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Income statement: Sales = 150 COGS = (48) Wages Exp. = (56) interst Exp = (12) Depreciation = (22) Gain on Sale of Equip. = 6 Income Tax exp. = (8) --------------------------- Net income = 10 Balance Sheet: 2014---2015 Cash = 32 --- 52 A/R = 18 --- 22 Inventory = 46 --44 PPE = 182 -- 160 ------------------------- Total Assets 278 -- 278 A/P = 28 --- 33 L/T debt = 145 --- 135 Common Stock = 70 --- 70 what is the cash flow from operations for the year end 2015? A.) $37 B.) $41 C) $29

*using the indirect method* Add: NI = 10 Add: Depreciation exp. = 22 Less: Gain on Sale of Equip= (6) Less: Increase in A/R = (4) Add: Decrease in Inventory = (2) Add: Increase in A/P = 5 CFO = 29 C is correct indirect relationship for increase/decrease for Inventory and A/R Direct relationship for increase/decrease for A/P

Which of the following is the vertical axis intercept for the Capital Market Line (CML)? A)Expected return on the portfolio. B)Expected return on the market. C)Risk-free rate.

A portfolio to the right of the market portfolio on the capital market line (CML) is created by: A)fully diversifying. B)holding more than 100% of the risky asset. C)holding both the risk-free asset and the market portfolio.

B is correct

A spectrum for assessing financial reporting quality should consider: A)quality of earnings only. B)both quality of financial reports and quality of earnings. C)quality of financial reports only.

B is correct

The pool of loans backing a commercial mortgage-backed security consists of: A)both recourse and nonrecourse loans. B)nonrecourse loans only. C)recourse loans only.

B is correct

The six-year spot rate is 7% and the five-year spot rate is 6%. The implied one-year forward rate five years from now is closest to: A)6.5%. B)12.0%. C)5.0%.

5y1y= [(1 + S(6))^6 / (1 + S(5))^5] - 1 = [(1.07)^6/(1.06)^5] - 1 = [1.5 / 1.338] - 1 = 0.12

A Laspeyres price index tends to: A)overstate the inflation rate, because its market basket is fixed. B)overstate the inflation rate because its market basket is variable. C)understate the inflation rate because its market basket is fixed.

Time-weighted returns are used by the investment management industry because they: A)are not affected by the timing of cash flows. B)result in higher returns versus the money-weighted return calculation. C)take all cash inflows and outflows into account using the internal rate of return.

An efficient capital market: A)fully reflects all of the information currently available about a given security, including risk. B)fully reflects all of the information currently available about a given security, excluding risk. C)does not fully reflect all of the information currently available about a given security, including risk.

An example of a *relative* value hedge fund strategy is: A)convertible arbitrage. B)market neutral. C)merger arbitrage.

An increase in real interest rates can be expected to: A)decrease investment and decrease consumption. B)increase government spending and decrease consumption. C)decrease investment and increase net exports.

A scientist working for a pharmaceutical company tries many models using the same data before reporting the one that shows that the given drug has no serious side effects. The scientist is guilty of: A)sample selection bias. B)data mining. C)look-ahead bias.

Companies are required to report segment data under: A)U.S. GAAP but not IFRS. B)both IFRS and U.S. GAAP. C)IFRS but not U.S. GAAP.

An objective of financial market regulation is to: A)reduce information gathering costs by requiring common financial reporting standards. B)ensure that inside information is made public in a timely manner. C)prevent uninformed investors from participating in financial markets.

Both IFRS and U.S. GAAP allow deferred taxes to be: A)presented as noncurrent on the balance sheet. B)recognized in equity after a fixed asset revaluation. C)measured using a substantially enacted tax rate.

Preferred stock most likely has a: A)fixed dividend and no maturity. B)fixed dividend and maturity. C)variable dividend and no maturity.

Concentration measures are most likely to be used to: A)analyze barriers to entry into an industry. B)identify the market structure of an industry. C)measure elasticity of demand facing an industry.

Carry amount --> $18,000 Undiscounted Exp. Fut. --> $16,000 PV of Exp. Fut CF --> $14,000 Fair value if sold --> $10,000 Cost to Sell ---> $2,000 Under GAAP, what would the company report for the machine?

1st Compare carry amount to undiscounted exp future CF --> (18,000 > 16,000) 2nd Carry amount exceeds undiscounted fut CF so carry amount is considered unrecoverable machine is therefore written down to 10,000 (fairvalue) with a loss of 18,000 - 10,000 = 8,000 Loss

The Austrian economic school attributes the primary cause of the business cycle to: A.) misguided government intervention. B.) the creative destruction of technological progress. C.) sticky price and wage expectations that exaggerate trends.

The Fisher effect holds that a nominal rate of interest equals a real rate: A)plus expected inflation. B)plus actual inflation. C)minus expected inflation.

The first step in the process of hypothesis testing is: A)to state the hypotheses. B)selecting the test statistic. C)the collection of the sample.

The relationship between savings (S), investment (I), government spending (G), government tax revenue (T), exports (X), and imports (M) is: A)(S - I) = (G - T) + (X - M). B)(G - T) = (S - I) + (X - M). C)(X - M) = (S - I) + (G - T).

Carry amount --> $18,000 Undiscounted Exp. Fut. --> $19,000 PV of Exp. Fut CF --> $16,000 Fair value if sold --> $17,000 Cost to Sell ---> $2,000 Under IFRS what would the company report for the machine, in regards to impairment ?

1st --> Compare carry value to (higher of Pv of exp fut CF or Fairvalue - cost to sell) *recoverable amount* 18,000 to (16,000 , 17,000-2000) *higher of two is recoverable amount **since carry amount exceeds recoverable amount the asset is deemed impaired** 2nd ---> Carry value - recoverable amount = impairment losss 18,000- 16,000 = *****2,000**** Finally 16,000 is new carry amount

The settlement price for a futures contract is: A)an average of the trade prices during the 'closing period'. B)the price of the asset in the future for all trades made in the same day. C)the price of the last trade of a futures contract at the end of the trading day.

Carry amount --> $18,000 Undiscounted Exp. Fut. --> $19,000 PV of Exp. Fut CF --> $16,000 Fair value if sold --> $17,000 Cost to Sell ---> $2,000 Under GAAP what would the company report for the machine?

1st compare carry amount to undiscounted Exp fut. CF (18,000, 19,000) 2nd --> Carry value is **less than** undiscounted future CF SO carry amount is **recoverable** ( if carry amount > undiscounted future exp CF then impairment loss is required ) machine will remain to be carried @ 18,000 and no impairment loss is recored

What happens to bond durations when coupon rates increase and maturities increase? As coupon rates increase, duration ---- As maturities increase, duration: A)increases ------- increases B)decreases ------decreases C)decreases ------increases

'C is correct As coupon rates increase the duration on the bond will decrease because investors are recieving more cash flow sooner. As maturity increases, duration will increase because the payments are spread out over a longer peiod of time.

The spot rate for Chinese yuan per Canadian dollar is 6.4440. If the Canadian interest rate is 2.50% and the Chinese interest rate is 3.00%, the 3-month no-arbitrage forward rate is closest to: A)6.436 CNY/CAD. B)6.452 CNY/CAD. C)6.475 CNY/CAD.

(1+.03/4 )/ (1.025/4) * 6.444 B is correct

If the GDP deflator values for year 1 and year 2 were 190 and 212.8, respectively, which of the following best describes the annual growth rate of the overall price level? A.) 5.8%. B.) 6%. C.) 12%.

(212.8/190)^1/2 - 1 = 0.0583 or 5.8%.

a fixed income security's current price is 101.45 . You estimate that the price will rise to 103.28 if interest rates decrease 0.25% and fall to 101.81 if the interest rates increase 0.25%. The security's effective duration is closest to? A.) 1.22' B.) 4.87 C.) 9.74

(price if rates fall - price if rates rise) / (2* Current price * change in rates) = (103.28- 100.81) / (2*101.45*0.0025) = 4.87

1.) ____________ is used to test a hypothesis about the variance of a SINGLE POPULATION? 2.) ______________ is used to test a hypothesis about the variance of Two populations? A.) Z- statistic B.) F - Distribution C.) T - Statistic D.) Chi - Distribution

1.) Chi 2.) F dist

Carry amount --> $132,000 Undiscounted Exp. Fut. --> $120,000 PV of Exp. Fut CF --> $100,000 Fair value if sold --> $105,000 Cost to Sell ---> $1,000 Under IFRS, the impairment loss on production will be ?

1.) Determine Carry value = 132,000 2.) *determine recoverable amount* Compare higher of (PV of expected future CF and (Fair-value - cost to sell) --> 100K<*104K* 3 compare carry value to recoverable amount --> 132>104 Asset is impaired because Carry value > recoverable --> so 132-104 = 28 (Writedown)

what is the bond equivalent yield or a 182 day US treasury bill that has a price of $9,725 per $10,000 face value is closest to? A.) 5.44% B.) 5.53% C.) 5.67%

10,000-9725/10,000 * 365/182 = C

*** learn for exam*** If X has a normal distribution with μ = 100 and σ = 5, then there is approximately a 90% probability that: A)P(91.8 < X < 108.3). B)P(90.2 < X < 109.8). C)P(93.4 < X < 106.7).

100 +/- 1.65 (5) = 91.75 to 108.25 or P (P(91.75 < X < 108.25).

suppose a company uses trade credit with the terms 2/10 net 50 if the company pays its account on the 50th day , the effective borrowing cost of skipping the discount rate on day 10 is closest to? A.) 14.9% B.) 15.0% C.) 20.2%

100/(100-2) ^365/(50-10) -1 = C

A buy limit order is said to be "inside the market" when: A)the limit is between the best bid and the best ask. B)it reaches the exchange floor and is entered in the limit book. C)the limit is below the best bid.

A A limit order with a limit price between the best bid and the best ask is said to be "inside the market" or "making a new market." A limit order that has not yet been executed is a "standing limit order."

A perfectly competitive firm will continue to increase output so long as which of the following conditions exists? A)Market price is greater than marginal cost. B)Marginal revenue is positive. C)Marginal revenue is greater than price.

A A perfectly competitive firm will tend to expand its output so long as the market price is greater than marginal cost since price and marginal revenue are equal. In the short term and long term, profit is maximized when marginal cost and marginal revenue are equal (i.e., MC = MR).

A perfectly competitive firm will not expand its output beyond the quantity where: A)the market price is equal to its marginal cost. B)its marginal revenue is positive. C)the marginal cost is greater than marginal revenue.

A A perfectly competitive firm will tend to expand its output so long as the market price is greater than marginal cost. In the short term and long term, profit is maximized when P = MC.

Which of the following will result from futures prices for a particular commodity being in contango? A)Negative roll yield. B)Positive current yield. C)Negative collateral yield.

A A positive roll yield results from a backwardated market, whereas a negative yield is produced in a contango market. In backwardated (contango) markets, futures prices are lower (higher) than spot prices.

Which of the following statements about securities exchanges is most accurate? A)Call markets are markets in which the stock is only traded at specific times. B)Setting a negotiated price to clear the market is a method used to set the closing price in major continuous markets. C)Continuous markets are markets where trades occur 24 hours per day.

A Continuous markets are markets where trades occur at any time the market is open (i.e., they do not need to be open 24 hours per day). Setting one negotiated price is a method used in major continuous markets to set the opening price.

Which of the following is the most likely result of a central bank's shift to an expansionary monetary policy? A)Exports increase. B)Domestic currency appreciates. C)Interest rates increase.

A Expansionary monetary policy decreases interest rates. This should cause the domestic currency to depreciate, which should increase foreign demand for the country's exports.

A Canadian hedge fund has a value of C$100 million at the beginning of the year. The fund charges a 2% management fee based on assets under management at the beginning of the year and a 20% incentive fee with a 10% hard hurdle rate. Incentive fees are calculated net of management fees. The value at the end of the year before fees is C$112 million. The net return to investors is closest to: A)10%. B)9%. C)8%.

A Management Fee: C$100.0 × 2.0% = C$2.0 million Gross value at end of year (given) = C$112.0 million Incentive fee = [(C$112.0 - C$100.0 - C$2.0 - (C$100.0 × 10.0%)] × 20% = C$0 Total fee = C$2.0 million Net of fee: C$112.0 - C$2.0 = C$110.0 million Net return = (C$110.0 / C$100.0) - 1 =10.0%

An investor made an investment in a hedge fund at the beginning of the year, when the NAV after fees was €80 million. The NAV after fees for Year 1 was €75 million. For Year 2, the end-of-year value before fees is €90 million. The fund has a 2 and 20 fee structure. Management fees are paid independently of incentive fees and are calculated on end-of-year values. Incentive fees are calculated using a high water mark and a soft hurdle rate of 2%. Total fees paid for Year 2 are: A)€3.8 million. B)€5.8 million. C)€4.4 million.

A Management fee = €90 million × 0.02 = €1.8 million. Gross return = (€90 / €75) - 1 = 20.0%. The soft hurdle rate was exceeded. Because of the high water mark, incentive fees are paid only on the increase in NAV above the previous year-end NAV after fees of €80 million. Incentive fee = (€90 million - €80 million) × 0.20 = €2.0 million. Total fee: €1.8 million + €2.0 million = €3.8 million. Note that the new high water mark is €90 million - €3.8 million = €86.2 million.

For which of the following investments is an investor most likely to require the greatest liquidity premium? A)Private equity funds. B)Commodity futures. C)Real estate investment trusts.

A Private equity funds tend to have lockup periods; investors will require liquidity premiums as compensation. REITs and commodity futures are exchange-traded instruments and much more liquid than private equity funds.

Which of the following financial ratios is *least likely* to be affected by classification of deferred taxes as a liability or equity? A)Return on assets (ROA). B)Return on equity (ROE). C)Leverage ratio.

A The ROA will not be affected by the classification of the deferred taxes. The total assets will remain the same regardless of whether the deferred taxes are classified as a liability or equity. Return on equity and the leverage ratio (assets/equity) would both be affected.

Sales and purchases of non-produced, non-financial assets are included in which of a country's trade accounts? A)Capital account. B)Current account. C)Financial account.

A The capital account consists of sales and purchases of non-produced, non-financial assets plus capital transfers.

An investor buys a pure-discount note that matures in 146 days for $971. The bond-equivalent yield is closest to: A)7.5%. B)3.0%. C)1.2%.

A The equivalent add-on return the investor earns for the 146-day holding period is $1,000 / $971 - 1 = 0.0299 = 2.99%. The bond-equivalent yield is (365 / 146) × 2.99% = 7.47%.

The price of a fixed-for-floating interest rate swap contract: A)is established at contract initiation. B)may vary over the life of the contract. C)is directly related to changes in the floating rate.

A The price of a swap contract is set such that the contract has a value of zero at initiation. The value of a fixed-for-floating interest rate swap contract may vary over its life as the floating rate changes.

When considering the impact of warrants on earnings per share, the method to calculate the number of shares added to the denominator is derived using which method? A)Treasury Stock method. B)Weighted average method. C)Cost recovery method.

A The treasury stock method assumes the hypothetical funds received by the company from the exercise of the options are used to purchase shares of the company's common stock in the market at the average market price.

A result that is most likely to give a financial manager concern that his firm's credit policy may have become too lenient is: A)weighted average collection period has increased. B)receivables turnover has increased significantly. C)inventory turnover has decreased considerably.

A The weighted average collection period is the average number of days it takes to collect a dollar of receivables. A decreased percentage of sales made on credit or an increase in the receivables turnover ratio might result from more strict credit terms. Inventory turnover is not directly affected by credit terms, only though the effect of credit terms on overall sales.

An increase in the riskless rate of interest, other things equal, will: A)increase call option values and decrease put option values. B)decrease call option values and increase put option values. C)decrease call option values and decrease put option values.

A An increase in the risk-free rate of interest will increase call option values and decrease put option values.

In accounting for PP&E using the cost model, companies are required to disclose both gross asset value and accumulated depreciation under: A)both IFRS and U.S. GAAP. B)U.S. GAAP but not IFRS. C)IFRS but not U.S. GAAP.

A Cost model is required for long term assets for GAAP but IFRS can use revaluation or cost model

The difference between personal income and disposable income is: A)taxes. B)savings. C)fixed expenses.

A Disposable income equals personal income minus taxes.

The crowding-out model implies that a: A)budget deficit will increase the real interest rate and thereby retard private investment. B)budget surplus will retard aggregate demand and trigger an economic downturn. C)budget deficit will stimulate aggregate demand and trigger a multiplier effect which will lead to inflation.

A will increase the demand for loanable funds and lead to higher interest rates and thus lower private investment. Crowding-out implies that an increase in government spending will choke off private investment and reduce the intended impact of fiscal policy changes on aggregate demand.

*** Know for the Exam *** Financial leverage magnifies: A)earnings per share variability. B)operating income variability. C)taxes.

A is correct

A (stop buy order @ 50 ) instructs the dealer to A.) Buy shares at 50 or more B.) buy shares at 50 or less

A is correct

A Laspeyres price index tends to: A)overstate the inflation rate, because its market basket is fixed. B)understate the inflation rate because its market basket is fixed. C)overstate the inflation rate because its market basket is variable.

A is correct

A characteristic of forward commitments is that they: A.) provide linear payoffs. B.) do not depend on the outcome or payoff of an underlying asset. C.) provide one party the right to engage in future transactions on terms agreed on in advance.

A is correct

A hedge fund strategy that takes positions in shares of firms undergoing restructuring or acquisition is an: A)event driven strategy. B)macro strategy. C)equity hedge strategy.

A is correct

A liquidity-based balance sheet, on which assets and liabilities are not classified as current or non-current, is permitted under: A)IFRS only. B)Both IFRS and U.S. GAAP. C)U.S. GAAP only.

A is correct

A market structure with relatively few sellers of a homogeneous or standardized product is best described as: A.) oligopoly. B.) monopoly. C.) perfect competition.

A is correct

A stock that plots below the Security Market Line most likely: A)is overvalued. B)is below the efficient frontier. C)has a beta less than one.

A is correct

A trend is most likely to continue if the price chart displays a(n): A)ascending triangle pattern. B)double top. C)inverse head and shoulders pattern.

A is correct

All else equal, a firm's business risk is higher when: A)fixed costs are the highest portion of its expense. B)the firm has low operating leverage. C)variable costs are the highest portion of its expense.

A is correct

An economic peak is most closely associated with: A.) accelerating inflation. B.) stable unemployment. C.) declining capital spending.

A is correct

An increase in notes payable would be classified as: A)financing cash flow. B)investing cash flow. C)having no cash flow impact.

A is correct

Capitalizing interest costs related to a company's construction of assets for its own use is required by: A)both IFRS and U.S. GAAP. B)IFRS only. C)U.S. GAAP only.

A is correct

Dividends or interest paid by the asset underlying a call option: A)decrease the value of the option. B)have no effect on the value of the option. C)increase the value of the option.

A is correct

Endowments and foundations typically have investment needs that can be characterized as: A)long time horizon, high risk tolerance, and low liquidity needs. B)short time horizon, low risk tolerance, and low liquidity needs. C)long time horizon, low risk tolerance, and high liquidity needs.

A is correct

Ethics are most accurately defined as: A)the study of moral principles. B)a belief about proper conduct. C)a written code of standards.

A is correct

Execution instructions tell you _____________ A.) How to trade B.) When to trade C.) How to settle a trade

A is correct

For an underlying asset that has no holding costs or benefits, the value of a forward contract to the long during the life of the contract is the: A)spot price minus the present value of the forward price. B)difference between the spot price and the forward price. C)present value of the difference between the spot price and the forward price.

A is correct

Gross domestic product includes the value of all goods: A)produced during the measurement period. B)purchased during the measurement period. C)produced and purchased during the measurement period.

A is correct

Holding other factors constant, a country can reduce its trade deficit by increasing its: A)private saving. B)domestic capital investment. C)government budget deficit.

A is correct

In dealing with the public and others, the CFA Institute *Code of Ethics* requires that CFA Institute members act with: A)integrity, competence, and respect. B)candor, skill, and honor. C)honesty, professionalism, and high ethical standards.

A is correct

Industry analysis is most likely to provide an analyst with insight about a company's: A)pricing power. B)financial performance. C)competitive strategy.

A is correct

A company will shut down production in the short run if total revenue is less than total: A.) fixed costs. B.) variable costs. C.) opportunity costs.

B is correct

Kettering Incorporated is a successful manufacturer of technology hardware. Kettering is seeking capital to finance additional growth that will position the company for an initial public offering. This stage of financing is most accurately described as: A)mezzanine-stage financing. B)angel investing. C)early-stage financing.

A is correct

Other things equal, as the number of compounding periods increases, what is the effect on the effective annual rate (EAR)? A)EAR increases. B)EAR decreases. C)EAR remains the same.

A is correct

Panelist 1 stated that he believed shifts in both aggregate demand and aggregate supply were driven primarily by changes in technology over time. Panelist 2 stated that she believed the focus of economic policy should be to directly increase aggregate demand by increasing the money supply or through fiscal policy. The views of Panelist 1 and Panelist 2 would best be described as which economic school of thought? -----Panelist 1 ----- Panelist 2 A)--Neoclassical --- Keynesian B)----Keynesian --- New Keynesian C)---New Classical --- Monetarist

A is correct

The demand curve for a firm in a perfectly competitive market is: A)horizontal. B)upward sloping. C)downward sloping.

A is correct

The difference between a firm's balance sheet assets and liabilities is equal to the firm's: A)book value of equity. B)market value of equity. C)intrinsic value of equity.

A is correct

The interbank funds market is most accurately described as: A)unsecured short-term loans from one bank to another. B)trading of negotiable certificates of deposit. C)banks' borrowing of reserves from the central bank.

A is correct

The internal rate of return (IRR) method and net present value (NPV) method of project selection will always provide the same accept or reject decision when: A)the projects are independent. B)up-front project costs are under $1.0 million. C)the projects are mutually exclusive.

A is correct

The market portfolio in Capital Market Theory is determined by: A)a line tangent to the efficient frontier, drawn from the risk-free rate of return. B)the intersection of the efficient frontier and the investor's highest utility curve. C)a line tangent to the efficient frontier, drawn from any point on the expected return axis.

A is correct

The most accurate description of nominal GDP is: A.) a measure of total expenditures at current prices. B.) the value of goods and services at constant prices. C.) a measure to compare one nation's economy to another.

A is correct

The only section of the statement of cash flows that must be adjusted to convert a statement of cash flows from the indirect to the direct method is: A)cash flows from operations. B)cash flows from financing. C)cash flows from investing.

A is correct

The probability of a Type ___ error is equal to the significance level of the test. A.) I B.) II

A is correct

The section of the Global Investment Performance Standards (GIPS) that outlines defining the firm and documenting firm policies and procedures is: A)Fundamentals of Compliance. B)Presentation and Reporting. C)Disclosures.

A is correct

The source of comparative advantage in the Heckscher-Ohlin model of trade is differences among countries in: A)relative scarcity of labor and capital. B)labor productivity. C)technological advancement.

A is correct

The yield from an investment in commodities that results from a difference between the spot price and a futures price is the: A)roll yield. B)convenience yield. C)collateral yield.

A is correct

To adjust for operating leases before calculating financial statement ratios, what value should an analyst add to a firm's liabilities? A)Present value of future operating lease payments. B)Sum of future operating lease obligations. C)Difference between present values of lease payments and the asset's future earnings.

A is correct

Under Standard IV(A) Loyalty (to employers): A)it is recommended that members deliver a copy of the Code and Standards to their employer. B)members are encouraged to leave an employer that does not adopt the Code and Standards as part of its policies and procedures. C)members are required to deliver a copy of the Code and Standards to their employer.

A is correct

What is the risk measure associated with the SML? A)Beta. B)Standard deviation. C)Market risk.

A is correct

When sampling from a nonnormal distribution with an known variance, which statistic should be used if the sample size is large and if the respective sample size is small? A)z-statistic; not available. B)t-statistic; t-statistic. C)z-statistic; z-statistic.

A is correct

When the price of the underlying is below the exercise price, a put option is: A.) in-the-money. B.) at-the-money. C.) out-of-the-money.

A is correct

When underwriting new corporate bonds, matrix pricing is used to get an estimate of the: A.) required yield spread over the benchmark rate. B.) market discount rate of other comparable corporate bonds. C.) yield-to-maturity on a government bond having a similar time-to-maturity.

A is correct

A firm is most likely to have pricing power if: A)its market share is high. B)its product is differentiated. C)costs to exit the industry are high.

B is correct

Which curve represents combinations of income and the real interest rate at which planned expenditure equals income? A.) The IS curve. B.) The LM curve. C.) The aggregate demand curve.

A is correct

Which of the following characteristics distinguishes a profession from an occupation? Members of a profession: A)abide by a code of ethics. B)view their work as a calling. C)are better compensated for their services.

A is correct

Which of the following classes of asset-backed securities typically includes a lockout period? A)Credit card ABS. B)Non-agency residential MBS. C)Auto loan ABS.

A is correct

Which of the following inputs is least likely required for the Markowitz efficient frontier? The: A)level of risk aversion in the market. B)expected return of all securities. C)covariation between all securities.

A is correct

Which of the following is least likely an example of external credit enhancements? A)Excess spread. B)Letters of credit. C)Bank guarantees.

A is correct

Which of the following is not necessarily included in an investment policy statement? A)Procedures to update the IPS when circumstances change. B)An investment strategy based on the investor's objectives and constraints. C)A benchmark against which to judge performance.

A is correct

Which of the following shows the dividend payment chronology in its proper sequence? A)Declaration date, ex-dividend date, holder-of-record date, payment date. B)Declaration date, holder-of-record date, ex-dividend date, payment date. C)Ex-dividend date, holder-of-record date, declaration date, payment date.

A is correct

Which of the following statements about hypothesis testing is most accurate? A Type II error is the probability of: A)failing to reject a false null hypothesis. B)rejecting a true null hypothesis. C)rejecting a true alternative hypothesis.

A is correct

for analytical purposes an analyst would prefer to use A.) LIFO COGS and FIFO Inventory B.) FIFO COGS and FIFO inventory C.) FIFO COGS and LIFO inventory

A is correct

when market participants expect the spot price of a commodity to be higher in the future, the commodity market is most likely said to be? Spot>Future A.) Contango B.) Full carry C.) Backwardation

A is correct

James Investments is calculating an equally weighted index on a four stock portfolio. Stock ------ Number of Shares --Initial Cost -- Current Cost ---->W---------- 100 ---------------- 5.00 --------- 5.00 ---->X ----------1,000 ---------------10.00 ---------12.50 ---->Y ---------- 500 ----------------7.50 ----------10.00 ---->Z -----------1500 ---------------5.00 ----------8.00 If the initial index value is 100, the current index is closest to: A)129.5. B)137.9. C)142.6.

A is correct First calculate the return relatives and then find the mean of the relatives. The number of shares is irrelevant in this question. 5/5 = 1 12.5/10 = 1.25 10/7.50 = 1.33 8/5 = 1.60 (1 + 1.25 + 1.33 + 1.60) / 4 = 1.295 100 × 1.295 = 129.5

In an informationally efficient market: A)buying and holding a broad market portfolio is the preferred investment strategy. B)the conditions exist for active investment strategies to achieve superior risk-adjusted returns. C)share prices adjust rapidly when companies announce results in line with expectations.

A is correct If financial markets are informationally efficient, active investment strategies cannot consistently achieve risk-adjusted returns superior to holding a passively managed index portfolio. In addition, a passive investment strategy has lower transactions costs than an active management strategy.

Which of the following statements about market efficiency is *least accurate*? A)The weak-form EMH suggests that fundamental analysis will not provide excess returns while the semi-strong form suggests that technical analysis cannot achieve excess returns. B)The semi-strong form EMH addresses market and non-market public information. C)The strong-form EMH assumes cost free availability of all information, both public and private.

A is correct The weak-form EMH suggests that technical analysis will not provide excess returns while the semi-strong form suggests that fundamental analysis cannot achieve excess returns. The weak-form EMH assumes the price of a security reflects all currently available historical information. Thus, the past price and volume of trading has no relationship with the future, hence technical analysis is not useful in achieving superior returns.

A Type I error: A)rejects a true null hypothesis. B)rejects a false null hypothesis. C)fails to reject a false null hypothesis.

A is correct Type I Error is defined as rejecting the null hypothesis when it is actually true. The probability of committing a Type I error is the significance level or alpha risk.

A is correct . Austrian economists see monetary policy mistakes as leading to booms and busts.

For a Giffen good, the: A.) demand curve is positively sloped. B.) substitution effect overwhelms the income effect. C.) income and substitution effects are in the same direction.

A is correct . The income effect overwhelms the substitution effect such that an increase in the price of the good results in greater demand for the good, resulting in a positively sloped demand curve.

The condition that occurs when a company disburses cash too quickly, stretching the company's cash reserves, is best described as a: A)pull on liquidity. B)drag on liquidity. C)liquidity premium.

A is correct A drag on liquidity occurs when cash inflows lag.

Which of the following represents a long position in an option? A)Buying a put option. B)Writing a call option. C)Writing a put option.

A is correct A long position is always the buying position. Remember that the buyer of an option is said to have gone long the position, while the writer (seller) of the option is said to have gone short the position.

When a security is added to a widely followed market index, the security's price is most likely to: A)increase. B)be unaffected. C)decrease.

A is correct Adding a security to a market index typically causes an increase in that security's price as portfolio managers who track the index purchase the security.

Starr Company is an asset management firm. Thomas Company is a manufacturer of apparel. Assuming these firms are representative of their industry groups, how are they best classified with regard to their sensitivity to the business cycle? --- -----Starr ----Thomas A)-----Cyclical ---- Cyclical B)Non-cyclical ---- Non-cyclical C)-----Cyclical ---- Non-cyclical

A is correct Asset management firms are classified in the financial services industry group. Apparel manufacturers are classified in the consumer discretionary industry group. Financial services and consumer discretionary are cyclical industry groups.

Assume that a 30-day commercial paper security has a holding period yield of 0.80%. The bond equivalent yield of this security is: A)9.73%. B)10.12%. C)9.60%.

A is correct BEY = HPY × (365/days) BEY = 0.80% × (365/30) = 9.73%

Zichron, Inc., had the following equity accounts on December 31: ----------------------------------------------------------------------- Common stock: 20,000 shares. Preferred stock A: 10,000 shares convertible into common on a 2 for 1 basis, dividend of $40,000 was declared during the year. Preferred stock B: 10,000 shares, convertible to common on a 4 for 1 basis, dividend of $5,000 was declared during the year. The company reported net income of $120,000 and paid a $20,000 dividend to its common shareholders. -------------------------------------------------------------------------- Diluted earnings per share for the year are: A)$1.50. B)$3.00. C)$1.33.

A is correct Basic EPS = ($120,000 - $40,000 - $5,000) / 20,000 = $3.75. Convertible preferred stock A: $40,000 / 2(10,000) = $2.00, which is less than basic EPS so the convertible preferred stock is dilutive. Convertible preferred stock B: $5,000 / 4($10,000) = $0.125, which is less than basic EPS so the convertible preferred stock is dilutive. Diluted EPS = $120,000 / [20,000 + 2(10,000) + 4(10,000)] = $1.50

Use the following financial data for Moose Printing Corporation, a U.S. GAAP reporting firm, to calculate the cash flow from operations (CFO) using the indirect method. ------------------------------------------------------------------------- Net income: $225 Increase in accounts receivable: $55 Decrease in inventory: $33 Depreciation: $65 Decrease in accounts payable: $25 Increase in wages payable: $15 Decrease in deferred taxes: $10 Purchase of new equipment: $65 Dividends paid: $75 ------------------------------------------------------------------------ A)Increase in cash of $248. B)Increase in cash of $183. C)Increase in cash of $173.

A is correct CFO = Net Income $225 − A/R $55 + Inventory $33 + Depreciation $65 − A/P $25 + Wages Payable $15 − Deferred taxes $10 = $248.

The component of the return on a futures position that results from interest earned on U.S. Treasury bills deposited to establish the position is called the: A)collateral yield. B)current yield. C)roll yield.

A is correct Collateral yield is the return earned on the collateral posted to satisfy margin requirements. In most cases, the collateral posted will be U.S. Treasury Bills, in which case the collateral yield is the T-bill yield.

Which of the following is a nonmonetary benefit of holding an asset? A)Convenience yield. B)Storage and insurance. C)Dividends.

A is correct Convenience yield refers to the nonmonetary benefits of holding an asset. Dividends are a monetary benefit. Storage and insurance are costs of holding an asset.

When calculating credit ratios, an analyst should increase a company's reported total debt if the company has: A)operating lease obligations. B)a net pension asset on its balance sheet. C)a debt guarantee from a parent or third party.

A is correct Credit analysts should add to a company's total debt its obligations such as operating lease payments and underfunded pension plans. A net pension asset results from an overfunded pension plan. A credit analyst should include a debt guarantee in the total obligations of the company that is making the guarantee.

Which of the following factors would least likely result in demand-pull inflation? An increase in: A)energy prices. B)the quantity of money. C)exports.

A is correct Demand-pull inflation can result from any factor that increases aggregate demand, including increases in the money supply, increases in exports, and increases in government purchases. Increases in the prices of productive inputs would result in cost-push inflation as aggregate supply decreases.

Equity securities are least likely issued to finance: A)inventories. B)equipment. C)research and development.

A is correct Equity securities are typically issued to finance a firm's long-lived assets, such as equipment, and long-term projects such as research and development.

For a company uses the LIFO inventory valuation method, a financial analyst can adjust the current ratio to the FIFO method by: A)adding the LIFO reserve to current assets. B)subtracting the LIFO reserve from current assets. C)adding the LIFO reserve to current liabilities.

A is correct FIFO inventory = LIFO inventory + LIFO reserve, and inventory is included in current assets, the numerator in the current ratio.

In contrast with a typical forward contract, futures contracts have: A)standardized terms. B)greater counterparty risk. C)less liquidity.

A is correct Futures are forward contracts that trade on exchanges and have standardized terms, in contrast with forward contracts, which are customized instruments. A futures clearinghouse reduces counterparty risk by guaranteeing the performance of buyers and sellers. Futures contracts trade on organized exchanges and are more liquid than forward contracts.

According to the Code of Ethics, the professional judgment of a member should be: A.) independent. B.) guided by the SEC guidelines. C.) dependent on that of his/her colleagues.

A is correct The Code of Ethics states that the CFA Institute member shall "Use reasonable care and exercise independent professional judgment." None of the other answers resemble anything in the Code.

Global depository receipts are most likely issued: A)outside the issuer's home country and denominated in U.S. dollars. B)in the United States and denominated in U.S. dollars. C)outside the issuer's home country and denominated in the exchange's home currency.

A is correct Global depository receipts are issued outside the U.S. and the issuer's home country and are most often denominated in U.S. dollars. Depository receipts issued in the United States and denominated in U.S. dollars are called American depository receipts. Global registered shares are denominated in the home currencies of the exchanges on which they trade.

Which of the following pooled investments is least likely to employ large amounts of leverage? A)Venture capital fund. B)Private equity buyout fund. C)Global macro hedge fund.

A is correct Hedge funds and buyout firms typically employ high leverage to acquire assets. Venture capital typically involves an equity interest.

Some forward contracts are termed cash settlement contracts. This means: A)either the long or the short in the forward contract will make a cash payment at contract expiration and the asset is not delivered. B)at contract expiration, the long can buy the asset from the short or pay the difference between the market price of the asset and the contract price. C)at settlement, the long purchases the asset from the short for cash.

A is correct In a cash settlement forward contract there is a cash payment at settlement by either the long or the short depending on whether the market price of the asset is below or above the contract price at expiration. The underlying asset is not purchased or sold at settlement.

A sequential-pay CMO has two tranches. Principal is paid to Tranche S until it is paid off, after which principal is paid to Tranche R. Compared to Tranche R, Tranche S has: A)more contraction risk and less extension risk. B)more contraction risk and more extension risk. C)less contraction risk and more extension risk.

A is correct In a sequential-pay CMO the short tranche, which receives principal payments and prepayments first, has more contraction risk, while the tranche that receives principal payments and prepayments last has more extension risk.

Which of the following would be assessed first in a top-down valuation approach? A)Fiscal policy. B)Industry return on equity (ROE). C)Industry risks.

A is correct In the top-down valuation approach, the investor should analyze macroeconomic influences first, then industry influences, and then company influences. Fiscal policy, as part of the macroeconomic landscape, should be analyzed first.

In dealing with the public and others, the CFA Institute Code of Ethics requires that CFA Institute members act with: A)integrity, competence, and respect. B)candor, skill, and honor. C)honesty, professionalism, and high ethical standards.

A is correct Integrity, competence, and respect are mentioned by name in the first component of the Code of Ethics.

A structured security is a combination of: A)a medium-term note and a derivative. B)a corporate bond and a syndicated loan. C)commercial paper and a backup line of credit.

A is correct Medium-term notes (MTNs) that are combined with derivatives to create features desired by an investor are known as structured securities.

The CFA Institute Code of Ethics specifies that CFA Institute Members and Candidates must do all of the following EXCEPT: A)refrain from any conduct that compromises the reputation or integrity of the CFA designation. B)act with integrity, competence, diligence, respect, and in an ethical manner. C)use reasonable care and exercise independent professional judgment when engaging in professional activities.

A is correct Not compromising the reputation or integrity of the CFA designation is a part of the Standards of Professional Conduct, but is not specifically mentioned the Code of Ethics.

Which of the following statements regarding bond market indexes is *least accurate* ? A)The bond universe is more stable than the stock universe. B)There are more bond issues than stocks. C)Unlike stocks, bonds lack continuous price trading data.

A is correct One reason why the creation of a bond index is more difficult than a stock index is due to the fact that the universe of bonds is constantly changing because of numerous new issues, bond maturities, calls, and bond sinking funds.

The price value of a basis point (PVBP) for a 18 year, 8% annual pay bond with a par value of $1,000 and yield of 9% is closest to: A)$0.82. B)$0.80. C)$0.44.

A is correct PVBP = initial price - price if yield changed by 1 bps. Initial price:Price with change:FV = 1000FV = 1000PMT = 80PMT = 80N = 18N = 18I/Y = 9%I/Y = 9.01CPT PV = 912.44375CPT PV = 911.6271 PVBP = 912.44375 - 911.6271 = 0.82

Preference shares will have the most risk for the investor if the shares are: A)callable and non-cumulative. B)non-callable and non-cumulative. C)callable and cumulative.

A is correct Preference shares (preferred stock) has more risk for the investor if they are non-cumulative than if they are cumulative, because with cumulative preference shares the firm must pay the holder any omitted dividends before it can pay any dividends to common shareholders. Callable shares have more risk for the investor than non-callable shares because the call option limits their potential for price appreciation.

Any rational quoted price for a financial instrument should: A)provide no opportunity for arbitrage. B)be low enough for most investors to afford. C)provide an opportunity for investors to make a profit.

A is correct Since any observed pricing errors will be instantaneously corrected by the first person to observe them, any quoted price must be free of all known errors. This is the basis behind the text's no-arbitrage principle, which states that any rational price for a financial instrument must exclude arbitrage opportunities.

Which of the following statements about legal and ethical standards is most accurate? A)Some illegal acts are considered ethical. B)Illegal acts are always unethical. C)Unethical acts are always illegal.

A is correct Some illegal acts, such as acts of civil disobedience, are considered ethical by many people. All unethical behavior is not necessarily illegal.

The "four Cs" of credit analysis include: A)capacity and character. B)collateral and capital. C)circumstances and covenants.

A is correct The "four Cs" of credit analysis are capacity, collateral, covenants, and character.

Point and figure charts are most likely to illustrate: A)changes of direction in price trends. B)the length of time over which trends persist. C)significant increases or decreases in volume.

A is correct Point and figure charts do not show volume and are not scaled to even time periods.

For an investment with *negatively skewed* returns, the most appropriate of the following risk measures is: A)Sortino ratio. B)shortfall risk. C)value at risk.

A is correct The Sortino ratio uses downside deviation, and therefore will capture the effects of negative skewness better than measures that use standard deviation. Value at risk (VaR) is a downside risk measure that estimates the potential loss from outcomes in the left tail of the distribution of returns but uses standard deviation, as does shortfall risk.

The after-tax cost of preferred stock is always: A)equal to the before-tax cost of preferred stock. B)less than the before-tax cost of preferred stock. C)higher than the cost of common shares.

A is correct The after-tax cost of preferred stock is equal to the before-tax cost of preferred stock, because preferred stock dividends are not tax deductible. The cost of preferred shares is usually higher than the cost of debt, but less than the cost of common shares.

The pool of loans backing a commercial mortgage-backed security consists of: A)nonrecourse loans only. B)recourse loans only. C)both recourse and nonrecourse loans.

A is correct The commercial real estate loans in a CMBS pool are nonrecourse loans.

Which of the following is least likely to be considered a constraint when preparing an investment policy statement? A)Risk tolerance. B)Liquidity needs. C)Tax concerns.

A is correct The constraints are: liquidity needs, time horizon, taxes, legal and regulatory factors, and unique needs and preferences. Risk tolerance is included in the investment objectives of the policy statement, not in the constraints.

A firm has a return on equity (ROE) of 15% and a dividend payout rate of 80%. If last year's dividend was $0.80 and the required return on equity is 10%, what is the firm's estimated dividend growth rate and what is the current stock price? Dividend growth rate --- Stock price A) -------3.00% -------------$11.77 B) -------3.00% -------------$9.96 C) -------12.00%-------------$11.77

A is correct The expected growth rate of dividends is the retention rate (RR) times the return on the equity portion of new investments (ROE), g = (RR)(ROE). The retention rate is 1 minus the payout rate. RR = (1 - 0.80) = 0.20. g = (0.20)(0.15)= 3.00%. The value of the stock will be the dividend paid next year divided by the required rate of return minus the growth rate. Next year's dividend is $0.80 × 1.03 = $0.824. So the value is 0.824 / (.10 - 0.03) = 0.824 / 0.07 = $11.77.

A bond's indenture *least likely* specifies the: A)identity of the lender. B)covenants that apply to the issuer. C)source of funds for repayment.

A is correct The identity of the lender (i.e., the bondholder) is not specified in a bond's indenture because a bond may be traded during its life. An indenture or trust deed is a legal contract that specifies a bond issuer's obligations and restrictions

The party to a forward contract that is obligated to purchase the asset is called the: A)long. B)receiver. C)short.

A is correct The long in a forward contract is obligated to buy the asset (in a deliverable contract). The term receiver is used with swaps.

Basil, Inc., common stock has a market value of $47.50. A put available on Basil stock has a strike price of $55.00 and is selling for an option premium of $10.00. The put is: A)in-the-money by $7.50. B)out-of-the-money by $2.50. C)in-the-money by $10.00.

A is correct The put allows a trader to sell Basil common stock for $7.50 more than the current market value ($55.00 − $47.50). The trade is normally closed out with a cash settlement, but the trader could buy 100 shares for $47.50 per share and immediately sell them to the option writer for $55.00.

An analyst has calculated the sample variances for two random samples from independent normally distributed populations. The test statistic for the hypothesis that the true population variances are equal is a(n): A)F-statistic. B)t-statistic. C)chi square statistic.

A is correct The ratio of the two sample variances follows an F distribution.

A short seller: A)does not receive the dividends. B)often also places a stop loss sell order. C)loses if the price of the stock sold short decreases.

A is correct The short seller pays all dividends to the lender, loses if stock prices rise, and is required to post a margin account. A short seller often places a stop buy order to protect the short sale position from a rising market.

If a company has a net profit margin of 5%, an asset turnover ratio of 2.5 and a ROE of 18%, what is the equity multiplier? A)1.44. B)0.69. C)2.25.

A is correct There are many different ways to illustrate ROE one of which is: ROE = (net profit margin)(asset turnover)(equity multiplier) 0.18 = (0.05)(2.5)(equity multiplier) 0.18 ÷ [(0.05)(2.5)] = equity multiplier 0.18 ÷ 0.125 = equity multiplier 0.18 ÷ 0.125 = 1.44

The relationship between a company's shareholders and its senior managers is best described as a(n): A)agency relationship. B)principal relationship. C)working partnership.

A is correct This is an example of an agency relationship, which is also known as a principal-agent relationship. A company's senior managers are acting as agents, hired to act in the interest of shareholders who are the principal in the relationship.

Kyra Mosby, M.D., has a patient who is complaining of severe abdominal pain. Based on an examination and the results from laboratory tests, Mosby states the following diagnosis hypothesis: Ho: Appendicitis, HA: Not Appendicitis. Dr. Mosby removes the patient's appendix and the patient still complains of pain. Subsequent tests show that the gall bladder was causing the problem. By taking out the patient's appendix, Dr. Mosby: A)made a Type II error. B)is correct. C)made a Type I error.

A is correct This statement is an example of a Type II error, which occurs when you fail to reject a hypothesis when it is actually false.

Value-at-Risk (VaR) and Conditional VaR are best described as measures of: A)tail risk. B)liquidity risk. C)model risk.

A is correct VaR and Conditional VaR are measures of tail risk, the probability of or magnitude of extreme negative outcomes in the tail of a distribution.

Which of the following statements about a GIPS-compliant firm's verification of GIPS compliance is most accurate? Verification is: A)optional, but if chosen it must be performed by an independent third party. B)required, and may be performed by the firm's internal auditors. C)required, and must be performed by an independent third party.

A is correct Verification of GIPS compliance is recommended but not required. If a firm chooses to obtain GIPS verification, it is required to be performed by an independent third party.

Many analysts prefer to use Monte Carlo simulation rather than historical simulation because: A)past distributions cannot address changes in correlations or events that have not happened before. B)computers can manipulate theoretical data much more quickly than historical data. C)it is much easier to generate the required variables.

A is correct While the past is often a good predictor of the future, simulations based on past distributions are limited to reflecting changes and events that actually occurred. Monte Carlo simulation can be used to model based on parameters that are not limited to past experience.

what is the probability that a *random variable* will be within A.) 1.96 st. dev of the mean is at least 74% B.) 1.65 st. devs of the mean is at least 90% C.) 2.5 st. devs of the mean is at least 84%

A is correct if the question stated that the variable was normal distribution. then B is correct use Chev inequality because the distribution isnt stated 1- (1/1.96^2) = 74%

The most integrated type of trading bloc or regional trade agreement is a(n): A)monetary union. B)common market. C)economic union.

A is correct least ----> Most integrated free trade area --> customs union --> common market --> economic union --> monetary union

In a net present value (NPV) profile, the internal rate of return is represented as the: A)intersection of the NPV profile with the horizontal axis. B)point where two NPV profiles intersect. C)intersection of the NPV profile with the vertical axis.

A is correct The internal rate of return is the rate of discount at which the NPV of a project is zero. On an NPV profile, this is the point where the profile intersects the horizontal axis.

Suppose the 3-year spot rate is 12.1% and the 2-year spot rate is 11.3%. Which of the following statements concerning forward and spot rates is most accurate? The 1-year: A)forward rate two years from today is 13.7%. B)forward rate one year from today is 13.7%. C)forward rate two years from today is 13.2%.

A is correct (1 + 0.121)^3 / (1 + 0.113)^2 = 1.137.

If X has a normal distribution with μ = 100 and σ = 5, then there is approximately a 90% probability that: A)P(91.8 < X < 108.3). B)P(90.2 < X < 109.8). C)P(93.4 < X < 106.7).

A is correct 100 +/- 1.65 (5) = 91.75 to 108.25 or P (P(91.75 < X < 108.25).

The difference between a Monte Carlo simulation and a historical simulation is that a historical simulation uses randomly selected variables from past distributions, while a Monte Carlo simulation: A)uses a computer to generate random variables. B)uses randomly selected variables from future distributions. C)projects variables based on a priori principles.

A is correct A Monte Carlo simulation uses a computer to generate random variables from specified distributions.

Which of the following is least likely to be a reason for imposing a suspension on a member or candidate? A)Misdemeanor charge for possession of narcotics. B)Discussing a question from the CFA exams on social media. C)Failing to return the annual professional conduct statement.

A is correct A misdemeanor charge not related to professional conduct is not grounds for a suspension. The other choices are violations of the Code and Standards and may result in CFA Institute imposing a suspension of membership or participation.

If a firm uses accelerated depreciation for tax purposes and straight-line depreciation for financial reporting, which of the following results is least likely? A)A permanent difference will result between tax and financial reporting. B)A temporary difference will result between tax and financial reporting. C)Income tax expense will be greater than taxes payable.

A is correct A permanent difference between tax and financial reporting is a difference that is expected to not reverse itself. Under normal circumstances, the effects of the different depreciation methods will reverse.

Which of the following statements best describes the impact of a valuation allowance on the financial statements? A valuation allowance: A)reduces reported income, reduces assets, and reduces equity. B)increases reported income, reduces assets, and reduces equity. C)reduces reported income, increases liabilities, and reduces equity.

A is correct A valuation allowance is a contra account (offset) against deferred tax assets that reflects the likelihood that the deferred tax assets will never be realized. The establishment of a valuation allowance reduces reported income, offsets (reduces) assets, and reduces equity.

Compliance with the CFA Institute Performance Presentation Standards (PPS) or the Global Investment Performance Standards (GIPS) is: A)the best way to comply with Standard III(D), Performance Presentation. B)the only way to comply with Standard III(D), Performance Presentation. C)required by the Code of Conduct.

A is correct According to the Standards of Practice Handbook, complying with the PPS and GIPS is the best way to comply with Standard III(D). However, a firm is not required to be in compliance with either PPS or GIPS in order to claim compliance with Standard III(D). Compliance with the PPS or GIPS is neither required by the Code and Standards nor the SEC.

Currency depreciation is most likely to affect the balance of trade when a country's imports are goods that: A)have close substitutes. B)represent a small proportion of consumer spending. C)have relatively inelastic demand.

A is correct According to the elasticities approach, the more elastic the demand for imports or exports, the greater the effect on the balance of trade from currency depreciation. Demand is more elastic for imports or exports when they are primarily goods with close substitutes, luxury goods, or goods that represent a large proportion of a consumer's spending.

Which of the following items is least likely an example of an intangible asset with an indefinite life? A)Acquired patents. B)Goodwill. C)Trademarks that can be renewed at minimal cost.

A is correct Acquired patents are most likely purchased with the intent to use over a specific period of time and therefore would be an example of an intangible asset with a finite life. Goodwill, by definition, is an intangible asset with an indefinite life. Trademarks that can be renewed at minimal cost are also considered to be intangible assets with infinite lives.

Which of the following items is least likely an example of an intangible asset with an indefinite life? A)Acquired patents. B)Trademarks that can be renewed at minimal cost. C)Goodwill.

The difference in production outcomes between monopolistic firms and purely competitive firms is best explained by the fact that: A)the profit maximizing output level for monopolists occurs at lower levels of production than for purely competitive firms. B)monopolists maximize profits by setting output such that marginal revenue exceeds marginal cost. C)monopolists maximize profits by setting output such that marginal revenue is maximized.

A is correct All firms maximize profits at the point where marginal revenue equal marginal cost. For a monopolist, this occurs at a lower output level than for a purely competitive firm, because the monopolist has a marginal revenue curve that falls below the demand curve, while the purely competitive firm has a marginal revenue curve that lies along the demand curve.

In equilibrium, an inefficient portfolio will plot: A)below the CML and on the SML. B)on the CML and below the SML. C)below the CML and below the SML.

A is correct An inefficient portfolio will plot below the CML. In equilibrium, all portfolios will plot on the SML.

A bond is priced at 95.80. Using a pricing model, an analyst estimates that a 25 bp parallel upward shift in the yield curve would decrease the bond's price to 94.75, while a 25 bp parallel downward shift in the yield curve would increase its price to 96.75. The bond's effective convexity is closest to: A)-167. B)3,340. C)4

A is correct Approximate effective convexity is calculated as [ V- + V+ - 2V0 ] / [ (V0)(change in curve)2 ]. [ 96.75 + 94.75 - 2(95.80) ] / [ (95.80)(0.0025)2 ] = -167.01.

Assume that a 30-day commercial paper security has a holding period yield of 0.80%. The bond equivalent yield of this security is: A)9.73%. B)10.12%. C)9.60%.

A is correct BEY = HPY × (365/days) BEY = 0.80% × (365/30) = 9.73%

Assume that a 30-day commercial paper security has a holding period yield of 0.80%. The bond equivalent yield of this security is: A)9.73%. B)10.12%. C)9.60%.

A is correct BEY = HPY × (365/days) BEY = 0.80% × (365/30) = 9.73%

Which of the following forms of short-term financing is typically used to facilitate international trade? A)Banker's acceptances. B)Commercial paper. C)Overdraft line of credit.

A is correct Banker's acceptances are used by firms that export goods. A banker's acceptance is a guarantee from the bank of the firm that has ordered the goods stating that a payment will be made upon receipt of the goods.

**know for the exam** Which of the following represents the mean, standard deviation, and variance of a standard normal distribution? A)0, 1, 1. B)1, 1, 1. C)1, 2, 4.

A is correct By definition, for the standard normal distribution, the mean, standard deviation, and variance are 0, 1, 1.

The continuously compounded rate of return that will generate a one-year holding period return of -6.5% is closest to: A)-6.7%. B)-6.3%. C)-5.7%.

A is correct Continuously compounded rate of return = ln(1 - 0.065) = -6.72%.

Which of the following is an analyst least likely to rely on as objective information to include in a company analysis? A)Corporate press releases. B)Proxy statements. C)Government agency statistical data on the economy and the company's industry.

A is correct Corporate reports and press releases are written by management and are often viewed as public relations or sales materials.

Other things equal, the no-arbitrage forward price of an asset will be higher if the asset has: A)storage costs. B)convenience yield. C)dividend payments.

A is correct Costs of holding an asset increase its no-arbitrage forward price. Benefits from holding the asset, such as dividends or convenience yield, decrease its no-arbitrage forward price.

If the standard deviation of returns for stock A is 0.40 and for stock B is 0.30 and the covariance between the returns of the two stocks is 0.007 what is the correlation between stocks A and B? A)0.05830. B)0.00084. C)17.14300.

A is correct CovA,B = (rA,B)(SDA)(SDB), where r = correlation coefficient and SDx = standard deviation of stock x Then, (rA,B) = CovA,B / (SDA × SDB) = 0.007 / (0.400 × 0.300) = 0.0583

What is the most likely effect on yield spreads when demand for bonds is high and supply of bonds is low? A)Yield spreads are likely to narrow. B)The effect on yield spreads will depend on whether supply or demand is the stronger influence. C)Yield spreads are likely to widen.

A is correct Credit spreads tend to narrow in times of high demand for bonds and widen in times of low demand for bonds. Credit spreads tend to widen under excess supply conditions, such as large issuance in a short period of time, and narrow when supply is low.

A $1,000 par value, 10%, semiannual, 20-year debenture bond is currently selling for $1,100. What is this bond's current yield and will the current yield be higher or lower than the yield to maturity? -Current Yield vs. YTM A)9.1% --- higher B)8.9% --- higher C)8.9% --- lower

A is correct Current yield = annual coupon payment/price of the bond CY = 100/1,100 = 0.0909

Default risk in a forward contract: A)is the risk to either party that the other party will not fulfill their contractual obligation. B)only applies to the short, who must make the cash payment at settlement. C)only applies to the long, and is the probability that the short can not acquire the asset for delivery.

A is correct Default risk in forward contracts is the risk to either party that the other party will not perform, whether that means pay cash or deliver the asset.

An analyst gathered the following information about a company: ---> Taxable income = $100,000. ---> Pretax income = $120,000. ---> Current tax rate = 20%. Assuming the difference between taxable income and pretax income will reverse in the future, the effect these events on the company's financial statements will be to report income tax expense of: A)$24,000 and an addition to deferred tax liabilities of $4,000. B)$22,000 with no change in deferred tax items. C)$24,000 and a decrease in deferred tax assets of $4,000.

A is correct Deferred tax liability = (120,000 − 100,000) × 0.2 = 4,000 Tax expense = current tax rate × taxable income + change in deferred tax liability 0.2 × 100,000 + 4,000 = 24,000

Which of the following factors would least likely result in demand-pull inflation? An increase in: A)energy prices. B)exports. C)the quantity of money.

Dividends or interest paid by the asset underlying a call option: A)decrease the value of the option. B)increase the value of the option. C)have no effect on the value of the option.

A is correct Dividends or interest paid by the underlying asset decrease the value of call options.

Paragon Company's operating profits are $100,000, interest expense is $25,000, and earnings before taxes are $75,000. What is Paragon's interest coverage ratio? A)4 times. B)3 times. C)1 time.

A is correct EBIT/I = Interest coverage ratio

Orchard Supply Company uses LIFO inventory valuation. Orchard had a cost of goods sold of $1 million for the most recent year. Inventory was $500,000 at the beginning of the year and $600,000 at the end of the year. Orchard Supply's LIFO reserve was $100,000 at the beginning of the year and $200,000 at the end of the year. What is Orchard Supply's cost of goods sold using FIFO inventory valuation? A)$900,000. B)$800,000. C)$1.1 million.

A is correct FIFO COGS = LIFO COGS − change in LIFO reserve = $1 million − $100,000 = $900,000.

The provisions for each section of the Global Investment Performance Standards (GIPS) are divided between: A)requirements and recommendations. B)fee-paying and non fee-paying portfolios. C)minimum standards and recommendations.

A is correct Firms must meet all requirements in order to claim compliance with the GIPS standards, and are encouraged to adopt and implement the recommendations.

The provisions for each section of the Global Investment Performance Standards (GIPS) are divided between: A)requirements and recommendations. B)minimum standards and recommendations. C)fee-paying and non fee-paying portfolios.

A is correct Firms must meet all requirements in order to claim compliance with the GIPS standards, and are encouraged to adopt and implement the recommendations.

Which of the following statements regarding Global Investment Performance Standards (GIPS) is most accurate? A)GIPS requires that all fee-paying discretionary portfolios be included in composites defined according to investment objective or similar strategy and firms must show GIPS compliant history for a minimum of five years or since inception if a composite has existed less than five years. B)GIPS exists as a best or maximum worldwide standard where local or country specific law for investment performance measurement does not exist. C)GIPS is intended to foster the notion of a world-wide regulatory body to oversee investment performance and measurement on a global scale.

A is correct GIPS provides a minimum, not a maximum, standard for investment performance measurement and/or presentation. GIPS is intended to foster the notion of self-regulation, not a world-wide regulatory body, to oversee investment performance and measurement.

Which of the following items would least likely be included in cash flow from financing? A)Gain on sale of stock of a subsidiary. B)Dividends paid to shareholders. C)Purchase of treasury stock.

A is correct Gains or losses will be found in cash flow from investments.

Which of the following actions is best described as taking place in the execution step of the portfolio management process? A)Choosing a target asset allocation. B)Developing an investment policy statement. C)Rebalancing the portfolio.

A is correct Rebalancing occurs in the feed back stage 1.) planning 2.) execution 3.) feed back

A distinction between Giffen goods and Veblen goods is that: A)Giffen goods are inferior goods, while Veblen goods are not inferior goods. B)the substitution effect is positive for a Veblen good but negative for a Giffen good. C)demand curves for Giffen goods slope upward, while demand curves for Veblen goods slope downward.

A is correct Giffen goods and Veblen goods, if they exist, have demand curves that slope upward over at least some range of prices. The substitution effect is positive for all goods.

in regards to the industry life cycle these characteristics (Cost cutting, intense competition and slow growth) are qualties of? A.) shakeout stage B.) growth stage C.) Embryonic stage

A is correct Growth stage ---> rapid demand, falling prices, stakeout stage ---> slower growth, intense competition, declining profitability, increased failures Embryonic stage ---> Slow growth, large investment required, high risk of failure, high prices

Rossdale, Inc., buys a small manufacturing plant with an estimated useful life of 12 years. The building includes two built-in machines that are expected to be replaced after four years and six years. Under International Financial Reporting Standards, Rossdale: A)must have separate depreciation schedules for the machines and the building. B)may have separate depreciation schedules for the machines and the building. C)must have a single depreciation schedule for the plant.

A is correct IFRS MUST have separate depreciation schedules GAAP MAY have separate depreciation schedules

According to IFRS guidance for management's commentary, addressing the company's key relationships is: A>) Recommended B>) Required C.) Neither recommended or required

A is correct IFRS recommends that management commentary address the company's key relationships, resources, and risks, as well as the nature of the business, management's objectives, the company's past performance, and the performance measures used. Securities regulators may impose requirements for publicly traded firms to address certain topics in management's commentary, but accounting standards do not.

Rossdale, Inc., buys a small manufacturing plant with an estimated useful life of 12 years. The building includes two built-in machines that are expected to be replaced after four years and six years. Under International Financial Reporting Standards, Rossdale: A)must have separate depreciation schedules for the machines and the building. B)must have a single depreciation schedule for the plant. C)may have separate depreciation schedules for the machines and the building.

A is correct IFRS requires firms to use component depreciation. Each component of an asset is depreciated separately based on its estimated useful life. U.S. GAAP permits component depreciation but does not require firms to use it.

A firm in a perfectly competitive industry that seeks to maximize profit is most likely to continue production in the SHORT RUN as long which of the following conditions exists? Price is equal to or greater than: A)average variable costs. B)marginal cost. C)average fixed cost.

A is correct If a firm is covering its average variable costs, it will continue to operate in the short run since it is covering some portion of its fixed costs.

A firm that is experiencing diseconomies of scale should: A)decrease its plant size. B)decrease output in the short run. C)shut down in the long run.

A is correct If a firm is experiencing diseconomies of scale, it should decrease its plant size to the efficient scale, which is the size that minimizes long-run average total cost. Plant size can be adjusted in the long run but not in the short run.

A firm can recognize a gain or loss on derecognition of a bond the firm has issued: A)before maturity, but not at maturity. B)at maturity, but not before maturity. C)either before maturity or at maturity.

A is correct If a firm redeems a bond before maturity for a price that is different from the carrying value of the bond liability, the firm will recognize the difference as a gain or a loss. At maturity, the carrying value of the bond liability is equal to the face value of the bond, therefore the firm does not experience a gain or loss by repaying the face value.

If timing differences that give rise to a deferred tax liability are not expected to reverse then the deferred tax: A)should be considered an increase in equity. B)should be considered an asset or liability. C)must be reduced by a valuation allowance.

A is correct If deferred tax liabilities are expected to reverse in the future, then they should be classified as liabilities. If, however, they are not expected to reverse in the future, then they should be classified as equity.

What is the risk measure associated with the CML? A)Standard deviation. B)Beta. C)Market risk.

A is correct In the context of the CML, the measure of risk (x-axis) is total risk, or standard deviation. Beta (systematic risk) is used to measure risk for the security market line (SML).

A major brokerage house is currently selling an investment product that offers an 8% rate of return, compounded monthly. Based on this information, it follows that this investment has: A)a periodic interest rate of 0.667%. B)a stated rate of 0.830%. C)an effective annual rate of 8.00%.

A is correct Periodic rate = 8.0 / 12 = 0.667. Stated rate is 8.0% and effective rate is 8.30%.

The formative stage of venture capital investing when capital is furnished for market research and product development is best characterized as the: A)seed stage. B)angel investing stage. C)early stage.

A is correct In the seed stage of venture capital investing, capital is furnished for product development, marketing, and market research. The angel investing stage is when investment funds are used for business plans and assessing market potential. The early stage refers to investments made to fund initial commercial production and sales.

**review for the exam* A parking lot has 100 red and blue cars in it. 40% of the cars are red. 70% of the red cars have radios. 80% of the blue cars have radios. What is the probability that the car is red given that it has a radio? A)37%. B)28%. C)47%.

A is correct In this case, P(red car has a radio) = 0.70 is divided by 0.76 (which is the Unconditional Probability of a car having a radio (40% are red of which 70% have radios) plus (60% are blue of which 80% have radios) or ((0.40) × (0.70)) + ((0.60) × (0.80)) = 0.76.) This result is then multiplied by the Prior Probability of a car being red, 0.40. The result is (0.70 / 0.76) × (0.40) = 0.37 or 37%.

Which of the following will increase the value of a call option? A)An increase in volatility. B)A dividend on the underlying asset. C)An increase in the exercise price.

A is correct Increased volatility of the underlying asset increases both put values and call values. A higher exercise price or an increase in cash flows on the underlying asset decrease the value of a call option.

With a one-tier board structure: A)both executives and non-executives can serve on the board of directors. B)senior managers determine corporate strategy. C)independent directors determine company strategy.

A is correct Independent directors and senior managers both serve on a single board with a one-tier board structure and are jointly responsible for determining corporate strategy.

***need to learn****** An analyst wants to estimate the yield to maturity on a non-traded 4-year, annual pay bond rated A. Among actively traded bonds with the same rating, 3-year bonds are yielding 3.2% and 6-year bonds are yielding 5.0%. Using matrix pricing the analyst should estimate a YTM for the non-traded bond that is closest to: A)3.8%. B)3.6%. C)4.1%.

A is correct Interpolating: 3.2% + [(4 - 3) / (6 - 3)] × (5.0% - 3.2%) = 3.8%

A large, creditworthy manufacturing firm would most likely get short-term financing by: A)issuing commercial paper. B)entering into an agreement for a committed line of credit. C)factoring its receivables.

A is correct Large, creditworthy firms can get the lowest cost of financing by issuing commercial paper. ****Selling receivables to a factor is a higher cost source of funds used by firms with poor credit quality****. A committed line of credit requires payment of a fee and represents bank borrowing, which would be attractive to a firm that did not have the size or creditworthiness to issue commercial paper.

Manufacturing and trade sales are best described as a: A)coincident indicator. B)leading indicator. C)lagging indicator.

A is correct Manufacturing and trade sales are a coincident indicator that generally reflects the current phase of the business cycle.

Deferred tax items should be measured based on the: A)tax rate that will apply when the temporary difference reverses. B)statutory tax rate at the time when the temporary difference is recognized. C)firm's effective tax rate at the time when the temporary difference reverses.

A is correct Measurement of deferred tax items is based on the tax rate that will apply when the temporary difference reverses. In some cases this may depend on how a temporary difference is settled, which determines whether a capital gains tax rate or income tax rate will apply.

Over-the- counter derivatives: A)are customized contracts. B)are backed by the OTC Clearinghouse. C)have good liquidity in the over-the-counter (OTC) market.

A is correct OTC derivative contracts (securities) are customized and have poor liquidity

Nelson, Inc. has fixed financing costs of $3 million, fixed operating costs of $5 million, and variable costs of $2.00 per unit. If the price of Nelson's product is $4.00, Nelson's operating breakeven quantity of sales is: A)2.5 million units. B)1.0 million units. C)4.0 million units.

A is correct Operating breakeven quantity = fixed operating costs / (price - variable cost per unit) = $5 million / ($4.00 - $2.00) = 2,500,000 units.

**review** A casual laborer has a 70% chance of finding work on each day that she reports to the day labor marketplace. What is the probability that she will work three days out of five? A)0.3087. B)0.6045. C)0.3192.

A is correct P(3) = 5! / [(5 - 3)! × 3!] × (0.7^3) × (0.3^2) = 0.3087

JME Construction signs a contract in the amount of $10 million with the following data available: Costs incurred in Year 1$2,200,000 Billings in Year 1$2,000,000 Cash collected in Year 1$1,750,000 Total cost of project$8,800,000 How much revenue should JME recognize for Year 1? A)$2,500,000. B)2,270,000. C)1,750,000.

A is correct Percentage of completion = 25%(2.2 / 8.8) Revenue to be recognized in Year 1 = 0.25 × 10 million = 2.5 million

Which of the following statements most accurately describes why the Global Investment Performance Standards (GIPS) were created? To: A)meet the need for a single globally accepted set of investment performance presentation standards. B)provide comparability of performance results among nations for which no presentation guidelines currently exist. C)meet the need for a single globally accepted set of regulatory guidelines among developed securities markets.

A is correct Recognizing the need for one globally accepted set of investment performance presentation standards, CFA Institute sponsored and funded the Global Investment Performance Standards Committee to develop and publish a single global standard by which all firms in all countries calculate and present performance to clients and prospective clients.

The most appropriate tool to use for intermarket analysis of two different asset classes is a: A)relative strength chart. B)moving average convergence/divergence chart. C)stochastic oscillator.

A is correct Relative strength charts are useful for intermarket analysis because they illustrate the performance of one asset, sector, or index relative to another. Momentum indicators, such as stochastic oscillators and MACD oscillators, are generally used to analyze individual markets.

In one year, a security market index has the following quarterly price returns: First quarter -- (3%) Second quarter -- (4%) Third quarter -- (-2%) Fourth quarter -- (5%) The price return for the year is closest to: A)10.2%. B)9.9%. C)10.00%

A is correct Return for the year = (1.03)(1.04)(0.98)(1.05) − 1 = 10.23%.

Arguments *against* being concerned about the size of a fiscal deficit include: A)Ricardian equivalence. B)the crowding-out effect. C)higher future taxes.

A is correct Ricardian equivalence suggests that it does not matter whether a government finances its spending with debt or a tax increase because the effect on the total level of demand in the economy is the same. Arguments **for being concerned about the size of the fiscal deficit** include the crowding-out effect of government borrowing taking the place of private sector borrowing and the negative effects on work incentives and entrepreneurship from higher future taxes.

Camphor Associates uses accrual basis for financial reporting purposes and cash basis for tax purposes. Cash collections from customers is $238,000, and accrued revenue is only $188,000. Assume expenses at 50% in both cases (i.e., $119,000 on cash basis and $94,000 on accrual basis), and a tax rate of 34%. What is the deferred tax asset/liability in this case? A deferred tax: A)asset of $8,500. B)liability of $8,500. C)asset of $48,960.

A is correct Since taxable income ($119,000) exceeds pretax income ($94,000), Camphor will have a deferred tax asset of $8,500 = [($119,000 − $94,000)(0.34)].

Inventory, cost of sales, and gross profit can be different under periodic and perpetual inventory systems if a firm uses which inventory cost method? A)LIFO or weighted average cost, but not FIFO. B)FIFO or weighted average cost, but not LIFO. C)LIFO or FIFO, but not weighted average cost.

A is correct The LIFO and weighted average cost methods can provide different values for inventory, cost of sales, and gross profit depending on whether the firm uses a periodic or perpetual inventory system. FIFO produces the same values from either a periodic or perpetual inventory system.

**know for the exam** For an investment with negatively skewed returns, the most appropriate of the following risk measures is: A)Sortino ratio. B)value at risk. C)shortfall risk.

A bond portfolio consists of a AAA bond, a AA bond, and an A bond. The prices of the bonds are $1,050, $1,000, and $950 respectively. The durations are 8, 6, and 4 respectively. What is the duration of the portfolio? A)6.07. B)6.00. C)6.67.

A is correct The duration of a bond portfolio is the weighted average of the durations of the bonds in the portfolio. The weights are the value of each bond divided by the value of the portfolio: portfolio duration = 8 × (1050 / 3000) + 6 × (1000 / 3000) + 4 × (950 / 3000) = 2.8 + 2 + 1.27 = 6.07.

Which of the following statements concerning the efficient frontier is most accurate? It is the: A)set of portfolios where there are no more diversification benefits. B)set of portfolios that gives investors the highest return. C)set of portfolios that gives investors the lowest risk.

A is correct The efficient frontier outlines the set of portfolios that gives investors the highest return for a given level of risk or the lowest risk for a given level of return. It is also the point at which there are no more benefits to diversification.

Consider a bond with modified duration of 5.61 and convexity of 43.84. Which of the following is closest to the estimated percentage price change in the bond for a 75 basis point decrease in interest rates? A)4.33%. B)4.12%. C)4.21%.

A is correct The estimated percentage price change is equal to the duration effect plus the convexity effect. The formula is: [-duration × (ΔYTM)] + ½[convexity × (ΔYTM)2]. Therefore, the estimated percentage price change is: [-(5.61)(-0.0075)] + [(½)(43.84)(-0.0075)2] = 0.042075 + 0.001233 = 0.043308 = 4.33%.

In contrast with most asset-backed securities (ABS), a collateralized debt obligation (CDO): A)employs a collateral manager. B)has senior and subordinate tranches. C)is issued through a special purpose vehicle.

A is correct The feature that distinguishes a CDO is that it has a collateral manager who buys and sells securities in the collateral pool to generate cash to meet the CDO's obligations.

The first step in developing a security market index is choosing the index's: A)target market. B)constituent securities. C)weighting method.

A is correct The first decision that must be made is choosing the target market the index will represent. Only then can the index provider determine which constituent securities should be included and which weighting scheme is most appropriate to measure the target market's returns.

Which of the following ratios would NOT be used to evaluate how efficiently management is utilizing the firm's assets? A)Gross profit margin. B)Payables turnover. C)Fixed asset turnover.

A is correct The gross profit margin is used to measure a firm's operating profitability, not operating efficient

A is correct The level of risk aversion in the market is not a required input. The model requires that investors know the expected return and variance of each security as well as the covariance between all securities.

Which measure of central tendency can be used for both numerical and categorical variables? A)Mode. B)Median. C)Mean.

A is correct The mode is the only choice that makes sense since you cannot take an average or median of categorical data such as bond ratings (AAA, AA, A, etc.) but the mode is simply the most frequently occurring number or category.

The mosaic theory is the idea that an analyst can: A)make recommendations or trade based on several pieces of public or nonpublic information, each piece by itself being nonmaterial, but when compiled the information becomes material. B)make investment recommendations on the basis of several pieces of nonpublic information as long as the aggregate information remains nonmaterial. C)base his recommendations on nonpublic material information only for the clients of the company, but not for the general public.

A is correct The mosaic theory permits an analyst to make recommendations based upon several pieces of public or nonmaterial information, even though the complied result is both material and nonpublic.

A normal distribution can be completely described by its: A)mean and variance. B)mean and mode. C)skewness and kurtosis.

A is correct The normal distribution can be completely described by its mean and variance.

According to Markowitz, an investor's optimal portfolio is determined where the: A)investor's highest utility curve is tangent to the efficient frontier. B)investor's utility curve meets the efficient frontier. C)investor's lowest utility curve is tangent to the efficient frontier.

A is correct The optimal portfolio for an investor is determined as the point where the investor's highest utility curve is tangent to the efficient frontier.

Regarding the technical points affecting the short sales of a stock, which of the following statements is most accurate? A)The short seller must pay all dividends due to the lender of the shorted stock. B)The lender must deposit margin to guarantee the eventual return of the stock. C)Stocks can only be shorted in a down market.

A is correct The short seller must pay any dividends on the stock to the owner of the borrowed shares

The short-run supply curve for a firm in a perfectly competitive market is equal to the firm's: A)MC curve. B)AVC curve. C)ATC curve.

A is correct The short-run supply curve for a firm in a perfectly competitive market is equal to the firm's MC curve. A price taker will maximize profits when it produces the output level where P = MC. As price rises, its point of intersection with the MC curve indicates optimal production.

The short-run supply curve for a purely competitive market: A)slopes upward to the right. B)slopes downward to the right. C)is a horizontal line.

A is correct The short-run supply curve for a purely competitive market slopes upward to the right. This reflects the fact that firms in the industry will produce more when the price rises.

Conditions that may cause firms to issue low-quality financial reports are best described as: A)inappropriate ethical standards and failing to correct known reportable conditions. B)opportunity, motivation, and rationalization. C)unstable organizational structure and deficient internal controls.

A is correct The three conditions that often lead to low-quality financial reporting are opportunity, motivation, and rationalization.

Yields on firms' investments in short-term securities for comparison purposes are best stated as: A) holding period return *(365/days to maturity) B) discount/face * (360/ days to maturity) C) holding period return * (360/ days to maturity)

A is correct The yields on investments in short-term securities should be stated as bond equivalent yields (BEYs), and returns on portfolios of these securities should be stated as a weighted average of BEYs

Bollinger bands are drawn based on the: A)standard deviation of recent price changes. B)difference between two smoothed moving averages. C)high and low prices in a recent period.

A is correct To use Bollinger bands, an analyst will calculate the standard deviation of prices over some number of trading days, and typically will draw the bands two standard deviations above and below a moving average for the same number of days.

Growth in total factor productivity is best described as driven by growth in: A)technology. B)capital. C)labor.

A is correct Total factor productivity represents increased productivity that cannot be directly accounted for by increases in capital and labor, and is generally considered to be driven by changes in technology.

The difference between a hedge fund's trading net asset value and its accounting net asset value is that: A)trading NAV tends to be lower because of illiquid assets. B)accounting NAV tends to be higher because of estimated liabilities. C)accounting NAV tends to be lower because of model prices.

A is correct Trading NAV adjusts accounting NAV downward to account for illiquidity of a hedge fund's investments, such as positions that are large relative to trading volume.

Under which of these conditions is a machine learning model said to be underfit? A)The model treats true parameters as noise. B)The model identifies spurious relationships. C)The input data are not labeled.

A is correct Underfitting describes a machine learning model that is not complex enough to describe the data it is meant to analyze. An underfit model treats true parameters as noise and fails to identify the actual patterns and relationship

**know for the exam** A firm holds two $50 million bonds with call dates this week. The probability that Bond A will be called is 0.80. The probability that Bond B will be called is 0.30. The probability that at least one of the bonds will be called is closest to: A)0.86. B)0.50. C)0.24.

A is correct We calculate the probability that at least one of the bonds will be called using the addition rule for probabilities: P(A or B) = P(A) + P(B) - P(A and B), where P(A and B) = P(A) × P(B) P(A or B) = 0.80 + 0.30 - (0.8 × 0.3) = 0.86

DELETE When demand for a good is inelastic, a higher price will: A)lead to an increase in total expenditures for the good. B)have no impact on the demand for the good. C)fail to reduce the quantity demanded for the good.

A is correct When demand is relatively inelastic, consumers do not reduce their quantity demanded very much when the price increases. That is, a given percentage increase in price results in a smaller percentage reduction in quantity demanded

A hedge fund that charges an incentive fee on all profits, but only if the fund's rate of return exceeds a stated benchmark, is said to have a: A)soft hurdle rate. B)hard hurdle rate. C)high water mark.

A is correct With a soft hurdle rate, a hedge fund charges an incentive fee on all profits, but only if the fund's rate of return exceeds a stated benchmark. With a *hard hurdle rate, a hedge fund charges an incentive fee only on the portion of returns that exceed a stated benchmark*. With a high water mark, a fund's value must exceed its highest previous value before the fund may charge an incentive fee.

The short-run supply curve for a purely competitive market: A)slopes upward to the right. B)is a horizontal line. C)slopes downward to the right.

A is correct demand curve is horizontal for perfectly competitive market

A stock that pays no dividend is currently priced at €42.00. One year ago the stock was €44.23. The continuously compounded rate of return is closest to: A)-5.17%. B)+5.17%. C)-5.04%.

A is correct ln (S1/S0) = ln (42/44.3) = ln .9496 = -.0517 or -5.17%

Bond dealers most often quote the: A.) flat price. B.) full price. C.) full price plus accrued interest.

A is correct. Bond dealers usually quote the flat price. When a trade takes place, the accrued interest is added to the flat price to obtain the full price paid by the buyer and received by the seller on the settlement date. The reason for using the flat price for quotation is to avoid misleading investors about the market price trend for the bond.

In a securitization, the special purpose entity (SPE) is responsible for the: A.) issuance of the asset-backed securities. B.) collection of payments from the borrowers. C.) recovery of underlying assets from delinquent borrowers.

A is correct. In a securitization, the special purpose entity (SPE) is the special legal entity responsible for the issuance of the asset-backed securities.

For a stock that pays no dividends, the value of an American call option is most likely: A.) the same as the value of a European call option with otherwise identical features. B.) greater than the value of a European call option with otherwise identical features. C.) less than the value of a European call option with otherwise identical features.

A is correct. American call prices can differ from European call prices only if the underlying stock is dividend paying. In the absence of such cash payments, European and American call options have the same value.

An excess spread account incorporated into a securitization is designed to limit: A.) credit risk. B.) extension risk. C.) contraction risk.

A is correct. An excess spread account, sometimes called excess interest cash flow, is a form of internal credit enhancement that limits credit risk

If the risk-free rate increases, the value of an in-the-money European put option will most likely: A.) decrease. B.) remain the same. C.) increase.

A is correct. An in-the-money European put option decreases in value with an increase in the risk-free rate. A higher risk-free rate reduces the present value of any proceeds received on exercise.

According to the Austrian school, the most appropriate government response to an economic recession is to: A.) allow the market to adjust naturally. B.) maintain steady growth in the money supply. C.) decrease the market rate of interest below its natural value.

A is correct. Austrian economists advocate limited government intervention in the economy. They advise that the best thing to do in a recession is to allow the necessary market adjustment to take place.

Which of the following would be included in Canadian GDP for a given year? The market value of: A.) wine grown in Canada by US citizens. B.) electronics made in Japan and sold in Canada. C.) movies produced outside Canada by Canadian film makers.

A is correct. Canadian GDP is the total market value of all final goods and services produced in a given time period within Canada. The wine was produced in Canada and counts towards Canadian GDP.

Eurocommerical paper is most likely: A.) negotiable. B.) denominated in euro. C.) issued on a discount basis.

A is correct. Commercial paper, whether US commercial paper or Eurocommercial paper, is negotiable—that is, investors can buy and sell commercial paper on secondary markets.

Conceptually, a forward rate agreement most likely allows a company that wants to invest money in the future to lock in a rate by making a: A.) variable payment and receiving a fixed payment. B.) fixed payment and receiving a different fixed payment. C.) fixed payment and receiving a variable payment.

A is correct. Forward rate agreements are forward contracts that conceptually allow lenders to lock in a fixed payment on a future investment by receiving a known payment and making an unknown payment that offsets the unknown future interest payment.

When a central bank announces a decrease in its official policy rate, the desired impact is an increase in: A.) investment. B.) interbank borrowing rates. C.) the national currency's value in exchange for other currencies.

A is correct. Investment is expected to move inversely with the official policy rate.

A national government responds to a severe recession by funding numerous infrastructure projects using deficit spending. Which school of economic thought is most consistent with such action. A.) Keynesian B.) Monetarist C.) Neoclassical

A is correct. Keynesian economics is based on government intervention in the form of fiscal policy.

Given an independent central bank, monetary policy actions are more likely than fiscal policy actions to be: A.) implementable quickly. B.) effective when a specific group is targeted. C.) effective when combating a deflationary economy.

A is correct. Monetary actions may face fewer delays to taking action than fiscal policy, especially when the central bank is independent.

Which of the following describes a typical feature of a non-agency residential mortgage-backed security (RMBS)? A.) Senior/subordinated structure B.) A pool of conforming mortgages as collateral C.) A guarantee by a government-sponsored enterprise

A is correct. Non-agency RMBS are credit enhanced, either internally or externally, to make the securities more attractive to investors. The most common forms of internal credit enhancements are senior/subordinated structures, reserve accounts, and overcollateralization

The tranches in a collateralized mortgage obligation (CMO) that are *most likely* to provide protection for investors against both extension and contraction risk are: A.) planned amortization class (PAC) tranches. B.) support tranches. C.) sequential-pay tranches.

A is correct. PAC tranches have limited (but not complete) protection against both extension risk and contraction risk

Which of the following is most likely a private real estate investment vehicle? A.) Real estate limited partnership B.) Real estate investment trust C.) Collateralized mortgage obligation

A is correct. Real estate limited partnerships are a form of private real estate investment.

The proposition that the real interest rate is relatively stable is most closely associated with: A.) the Fisher effect. B.) money neutrality. C.) the quantity theory of money.

A is correct. The Fisher effect is based on the idea that the real interest rate is relatively stable. Changes in the nominal interest rate result from changes in expected inflation.

The yield spread of a specific bond over the standard swap rate in that currency of the same tenor is bestdescribed as the: A.) I-spread. B.) Z-spread. C.) G-spread.

A is correct. The I-spread, or interpolated spread, is the yield spread of a specific bond over the standard swap rate in that currency of the same tenor. The yield spread in basis points over an actual or interpolated government bond is known as the G-spread. The Z-spread

A measure that is most likely well suited to analyzing the performance of alternative investments that may exhibit negative skewness in returns is the: A.) Sortino ratio. B.) Sharpe ratio. C.) safety-first measure.

A is correct. The Sharpe ratio and the safety-first measure use standard deviation as the measure of risk, which ignores the negative skewness in returns. The Sortino ratio uses the downside deviation as the measure of risk, which will reflect negative skewness if present.

The *sale of mineral rights* would be captured in which of the following balance of payments components? A.) Capital account. B.) Current account. C.) Financial account.

A is correct. The capital account measures capital transfers and sale and purchase of non-produced, *non-financial assets* such as mineral rights and intangible assets.

Compared with the weighted average coupon rate of its underlying pool of mortgages, the pass-through rate on a mortgage pass-through security is: A.) lower. B.) the same. C.) higher.

A is correct. The coupon rate of a mortgage pass-through security is called the pass-through rate, whereas the mortgage rate on the underlying pool of mortgages is calculated as a weighted average coupon rate (WAC). The pass-through rate is lower than the WAC by an amount equal to the servicing fee and other administrative fees.

Over time, a forward contract most likely has variable: A.) value and constant price. B.) price and constant value. C.) value and variable price.

A is correct. The price of a forward contract remains constant throughout its life. It is set as part of the contract specifications. The value varies with changes in the price of the underlying.

The value of a European call option is inversely related to the: A.) exercise price. B.) time to expiration. C.) volatility of the underlying.

A is correct. The value of a European call option is inversely related to the exercise price. A lower exercise price means there are more potential outcomes at which the call expires in-the-money.

Which of the following statements related to securitization is correct? A.) Time tranching addresses the uncertainty of a decline in interest rates. B.) Securitizations are rarely structured to include both credit tranching and time tranching. C.) Junior and senior bond classes differ in that junior classes can only be paid off at the bond's set maturity.

A is correct. Time tranching is the creation of bond classes that possess different expected maturities so that prepayment risk can be redistributed among bond classes. When loan agreements provide borrowers the ability to alter payments, in the case of declining interest rates, this prepayment risk increases because borrowers tend to pay off part or all of their loans and refinance at lower interest rates.

When issuing debt, a company may use a sinking fund arrangement as a means of reducing: A.) credit risk. B.) inflation risk. C.) interest rate risk.

A is correct. A sinking fund arrangement is a way to reduce credit risk by making the issuer set aside funds over time to retire the bond issue

**know for the exam** A national government responds to a severe recession by funding numerous infrastructure projects using deficit spending. Which school of economic thought is most consistent with such action. A.) Keynesian B.) Monetarist C.) Neoclassical

A is correct. Keynesian economics is based on government intervention in the form of fiscal policy

Credit derivatives are least accurately characterized as: A)forward commitments. B)contingent claims. C)insurance.

A is corrrect Credit derivatives are contingent claims and not forward commitments because their payoff depends on a future event taking place. Credit derivatives are essentially insurance against a credit event.

A is corrrect All firms maximize profits at the point where marginal revenue equal marginal cost. For a monopolist, this occurs at a lower output level than for a purely competitive firm, because the monopolist has a marginal revenue curve that falls below the demand curve, while the purely competitive firm has a marginal revenue curve that lies along the demand curve.

One of the assumptions underlying the capital asset pricing model is that: A)there are no transactions costs or taxes. B)only whole shares or whole bonds are available. C)each investor has a unique time horizon.

A is incorrect The CAPM assumes frictionless markets, i.e., no taxes or transactions costs. Among the other assumptions of the CAPM are that all investors have the same one-period time horizon and that all investments are infinitely divisible.

A underpriced stock will plot (Below/Above) the Security Market Line (SML)?

Above

A distribution that is *more* peaked than normal is: A)skewed. B)leptokurtic. C)platykurtic.

A legally binding promise to buy 140 oz. of gold two months from now at a price agreed upon today is most likely a: A)futures contract. B)forward commitment. C)hedge.

Depreciation expense would be classified as: A)investing cash flow. B)having no cash flow impact. C)operating cash flow.

Robo-advisory services are most likely to be appropriate for an investor who is interested in: A)high-frequency trading. B)traditional asset classes. C)actively managed investments.

Sampling error is the: A)difference between the point estimate of the mean and the mean of the sampling distribution. B)difference between a sample statistic and its corresponding population parameter. C)estimation error created by using a non-random sample.

Shareholders selling shares between the ex-dividend date and holder-of-record date: A)do not receive the dividend, which stays with the company. B)receive the dividend. C)do not receive the dividend, which is paid to the share buyer.

The *demand* for money curve represents the relationship between the quantity of money demanded and: A)the price level. B)short-term interest rates. C)the quantity of money supplied.

The optimal portfolio in the Markowitz framework occurs when an investor achieves the diversified portfolio with the: A)highest return. B)highest utility. C)lowest risk.

The typical trade used by a merger arbitrage fund is: A)short positions in both the acquirer and the firm being acquired. B)short position in acquirer, long position in firm being acquired. C)long position in acquirer, short position in firm being acquired.

*Point and figure charts* are most likely to illustrate: A)significant increases or decreases in volume. B)changes of direction in price trends. C)the length of time over which trends persist.

B A point-and-figure chart includes only significant price changes, regardless of their timing or volume. The technician determines what price interval to record as significant (the box size) and when to note changes of direction in prices (the reversal size). Point and figure charts do not show volume and are not scaled to even time periods.

An empirical probability is one that is: A)determined by mathematical principles. B)derived from analyzing past data. C)supported by formal reasoning.

B An empirical probability is one that is derived from analyzing past data. For example, a basketball player has scored at least 22 points in each of the season's 18 games. Therefore, there is a high probability that he will score 22 points in tonight's game.

Measures of interest rate sensitivity least likely include: A)duration. B)beta. C)rho.

B Beta measures the market risk of an asset or portfolio. Duration measures the interest rate sensitivity of the value of a fixed-income security or portfolio. Rho measures the interest rate sensitivity of the value of a derivative.

A pooled investment with a share price significantly different from its net asset value (NAV) per share is most likely a(n): A)open-end fund. B)closed-end fund. C)exchange-traded fund.

B Closed-end funds' share prices can differ significantly from their NAVs. Open-end fund shares can be purchased and redeemed at their NAVs. Market forces keep exchange-traded fund share prices close to their NAVs because arbitrageurs can profit by trading when there are differences.

A portfolio manager who adds hedge funds to a portfolio of traditional securities is most likely seeking to: A)decrease portfolio variance only. B)both increase expected returns and decrease portfolio variance. C)increase expected returns only.

B For a portfolio of traditional securities, adding alternative investments such as hedge funds can potentially increase the portfolio's expected returns, because these investments often have higher expected returns than traditional investments, and decrease portfolio variance, because returns on these investments are less than perfectly correlated with returns on traditional investments.

Which of the following will increase the value of a call option? A)A dividend on the underlying asset. B)An increase in volatility. C)An increase in the exercise price.

B Increased volatility of the underlying asset increases both put values and call values. A higher exercise price or an increase in cash flows on the underlying asset decrease the value of a call option.

A stated interest rate of 9% compounded quarterly results in an effective annual rate closest to: A)9.2%. B)9.3%. C)9.4%.

B Quarterly rate = 0.09 / 4 = 0.0225. Effective annual rate = (1 + 0.0225)^4 - 1 = 0.09308, or 9.308%.

According to Real Business Cycle models, an economic contraction is most likely caused by: A.) sticky wages. B.) rising energy prices. C.) a contraction in the money supply.

B Real Business Cycle models conclude that expansions and contractions of the economy are responses to external shocks, such as supply shocks arising from advances in technology or changes in the relative prices of inputs (e.g., energy prices).

The yield from an investment in commodities that results from a difference between the spot price and a futures price is the: A)convenience yield. B)roll yield. C)collateral yield.

B Roll yield is the yield return due to a difference between the spot price and futures price, or a difference between two futures prices with different expiration dates, and results from futures prices converging to the spot price as futures contracts approach their expiration dates. Roll yield may be positive or negative.

*know for the exam* In a period of rising prices, LIFO liquidation results in: A)higher inventory. B)higher earnings. C)lower earnings.

B Since older layers of inventory that are liquidated were purchased at lower prices, the cost of goods sold will be lower and earnings will be higher.

The market portfolio in Capital Market Theory is determined by: A)a line tangent to the efficient frontier, drawn from any point on the expected return axis. B)a line tangent to the efficient frontier, drawn from the risk-free rate of return. C)the intersection of the efficient frontier and the investor's highest utility curve.

B The Capital Market Line is a straight line drawn from the risk-free rate of return (on the Y axis) through the market portfolio. The market portfolio is determined as where that straight line is exactly tangent to the efficient frontier.

The LM curve is drawn holding which of the following factors constant? A)Real interest rate. B)Real money supply. C)Real GDP.

B The LM curve illustrates the relationship between real income and the real interest rate, for a given level of the real money supply.

An investor buys a pure-discount note that matures in 146 days for $971. The bond-equivalent yield is closest to: A)3.0%. B)7.5%. C)1.2%.

B The equivalent add-on return the investor earns for the 146-day holding period is $1,000 / $971 - 1 = 0.0299 = 2.99%. The bond-equivalent yield is (365 / 146) × 2.99% = 7.47%

The payoff of a call option on a stock at expiration is equal to: A)the minimum of zero and the stock price minus the exercise price. B)the maximum of zero and the stock price minus the exercise price. C)the maximum of zero and the exercise price minus the stock price.

B The payoff on a call option on a stock is Max (0, S - X).

U.S. GAAP least likely requires property, plant, and equipment to be tested for impairment: A)when an asset is reclassified as held-for-sale. B)at least annually. C)when events indicate the firm may not recover the asset's carrying value.

B Under U.S. GAAP, a PP&E asset is tested for impairment when events and circumstances indicate the firm may not recover its carrying value through future use, or if the asset is reclassified from held-for-use to held-for-sale. Under IFRS, firms are also required to assess at least annually whether events and circumstances indicate impairment may have occurred.

A portfolio manager who adds commodities to a portfolio of traditional investments is most likely seeking to: A)both increase expected returns and decrease portfolio variance. B)decrease portfolio variance only. C)increase expected returns only.

B Unlike most alternative investments, expected returns on commodities are typically less than expected returns on traditional investments.

Assume a sample of beer prices is negatively skewed. Approximately what percentage of the distribution lies within plus or minus 2.40 standard deviations of the mean? A)58.3%. B)82.6%. C)95.5%.

B Use Chebyshev's Inequality to calculate this answer. Chebyshev's Inequality states that for any set of observations, the proportion of observations that lie within k standard deviations of the mean is at least 1 - 1/k2. We can use Chebyshev's Inequality to measure the minimum amount of dispersion whether the distribution is normal or skewed. Here, 1 - (1 / 2.42) = 1 - 0.17361 = 0.82639, or 82.6%.

With respect to exchange rate regimes, crawling bands are most likely used in a transition toward: A)a monetary union. B)floating exchange rates. C)a fixed peg arrangement.

B When exchange rates are managed within crawling bands, the margin around a target exchange rate increases over time. This technique is sometimes used in a transition from fixed exchange rates to freely floating exchange rates.

The government budget deficit of Country M is increasing. At the same time, the government budget surplus of Country N is decreasing. Are the fiscal policies of these countries expansionary or contractionary? A)Both are contractionary. B)Both are expansionary. C)One is expansionary and one is contractionary.

B Expansionary fiscal policy increases a budget deficit or decreases a budget surplus. Contractionary fiscal policy decreases a budget deficit or increases a budget surplus.

Gross domestic product includes the value of all goods: A)produced and purchased during the measurement period. B)produced during the measurement period. C)purchased during the measurement period.

B Gross domestic product (GDP) is the sum of the *market values* of all goods and services produced during a measurement period.

According to the IFRS framework, timeliness is a characteristic that enhances: A)only faithful representation. B)both relevance and faithful representation. C)only relevance.

B In the IFRS framework, timeliness, comparability, verifiability, and understandability are characteristics that enhance the two fundamental qualitative characteristics, relevance and faithful representation.

Springfield Fund of Funds invests in two hedge funds, DXS and REF funds. Springfield initially invested $50.0 million in DXS and $100.0 million in REF. After one year, DXS and REF were valued at $55.5 million and $104.5 million, respectively, net of both hedge fund management fees and incentive fees. Springfield Fund of Funds charges 1.0% management fee based on assets under management at the beginning of the year and a 10.0% incentive fee independent of management fees. The annual net return for Springfield Fund of Funds is closest to: A)5.5%. B)5.0%. C)6.0%.

B Management fee = $150.0 × 1.0% = $1.5 million Net value at end of year after hedge fund fees = $55.5 + $104.5 = $160.0 million Incentive fee = ($160.0 - $150.0) × 10% = $1.0 million Total fees = $1.5 + $1.0 = $2.5 million Net of fees: $160.0 - $2.5 = $157.5 million Net return = ($157.5 / $150.0) - 1 = 5.0%

Are dividends paid to common shareholders and foreign currency translation gains and losses included in a firm's other comprehensive income? Dividends paid ----- Foreign currency translation gains and losses A)-------Yes ------------Yes B)-------No -------------Yes C)-------No -------------No

B Other comprehensive income includes non-owner transactions that affect shareholders' equity and are not recognized in net income. Dividends paid are transactions with the owners of the firm, so dividends paid are not included in other comprehensive income. Foreign currency translation gains and losses are non-owner transactions that are not recognized in net income. Thus, foreign currency translation gains and losses are included in other comprehensive income.

Which of the following statements about the discounted payback period is least accurate? The discounted payback: A)method can give conflicting results with the NPV. B)period is generally shorter than the regular payback. C)frequently ignores terminal values.

B incorrect discounted payback period is generally longer then the regular payback period

*know for the exam* Financial leverage magnifies: A)taxes. B)earnings per share variability. C)operating income variability.

B is correct

A (Limit buy order @ 50) instructs the dealer to A.) Buy shares at 50 or more B.) buy shares at 50 or less

B is correct

A characteristic of negotiable certificates of deposit is: A.) they are mostly available in small denominations. B.) they can be sold in the open market prior to maturity. C.) a penalty is imposed if the depositor withdraws funds prior to maturity.

B is correct

A statistical estimator is unbiased if: A)the variance of its sampling distribution is smaller than that of all other estimators. B)the expected value of the estimator is equal to the population parameter. C)an increase in sample size decreases the standard error.

B is correct

A summary measure of a characteristic of an entire population is called a: A)census. B)parameter. C)statistic.

B is correct

A synthetic collateralized debt obligation (CDO) is backed by a pool of: A)leveraged bank loans. B)credit default swaps C)other CDOs.

B is correct

An example of a relative value hedge fund strategy is: A)market neutral. B)convertible arbitrage. C)merger arbitrage.

B is correct

An objective of the risk management process is to: A)minimize the risks faced by an organization. B)identify the risks faced by an organization. C)eliminate the risks faced by an organization.

B is correct

At expiration, the value of a call option is the greater of zero or the: A)exercise price minus the exercise value. B)underlying asset price minus the exercise price. .

B is correct

At the end of 2007, Decatur Corporation reported last-in, first-out (LIFO) inventory of $20 million, cost of goods sold (COGS) of $64 million, and inventory purchases of $58 million. If the LIFO reserve was $6 million at the end of 2006 and $16 million at the end of 2007, compute first-in, first-out (FIFO) inventory at the end of 2007 and FIFO COGS for the year ended 2007. FIFO InventoryFIFO COGS A)$36 million$74 million B)$36 million$54 million C)$26 million$54 million

B is correct

Both IFRS and U.S. GAAP allow deferred taxes to be: A)measured using a substantially enacted tax rate. B)presented as noncurrent on the balance sheet. C)recognized in equity after a fixed asset revaluation.

B is correct

CML displays relationship between A.) Beta and expected return B.) St. Dev and expected return

B is correct

Compared to a term repurchase agreement, an overnight repurchase agreement is most likely to have a: A)higher repo rate and repo margin. B)lower repo rate and repo margin. C)lower repo rate and higher repo margin.

B is correct

Deferred tax liabilities may result from: A)pretax income less than taxable income due to temporary differences. B)pretax income greater than taxable income due to temporary differences. C)pretax income greater than taxable income due to permanent differences.

B is correct

Enterprise value is most accurately described as a firm's: A)market value of stock plus cash and short-term investments, minus market value of debt. B)market value of stock plus market value of debt, minus cash and short-term investments. C)market value of assets minus market value of liabilities, plus cash and short-term investments.

B is correct

For a call option, if the underlying asset's value is less than the option's exercise price, the option is said to be: A.) at the money. B.) out of the money. C.) in the money.

B is correct

For financial assets classified as trading securities, how are unrealized gains and losses reflected in shareholders' equity? A.) they are not recognized B.) they flow through to retained earnings C.) hey are a component of accumulated other comprehensive income

B is correct

For purposes of financial analysis, an analyst should: A)always consider deferred tax liabilities as a liability. B)determine the treatment of deferred tax liabilities on a case-by-case basis. C)always consider deferred tax liabilities as stockholder's equity.

B is correct

Government-owned assets abroad and foreign-owned assets in the country are included in which of the balance of payments accounts? A)Capital account. B)Financial account. C)Current account.

B is correct

In the Ricardian model of trade, the source of comparative advantage is: A)capital productivity. B)labor productivity. C)the difference between labor productivity and capital productivity.

B is correct

Patent fees and legal service AND Income from foreign investments are recorded in A.) Capital account. B.) Current account. C.) Financial account.

B is correct

Settlement for a government bond trade most likely occurs on the: A)third trading day after the trade. B)next trading day after the trade. C)second trading day after the trade

B is correct

Shares in a publicly traded company that owns gold mines and mining operations are considered: A)physical assets. B)financial assets. C)real assets.

B is correct

Social infrastructure assets most likely include: A)waste treatment plants. B)health care facilities. C)broadcasting towers.

B is correct

The CFA Institute Professional Conduct Program may impose sanctions on: A)CFA charterholders, member firms, and candidates for the CFA designation. B)CFA charterholders and candidates for the CFA designation. C)CFA charterholders only.

B is correct

The first step in managing an organization's risks should be to determine: A)the organization's risk exposures. B)the organization's risk tolerance. C)a risk budget for the organization.

B is correct

The optimal capital budget is the amount of capital determined by the: A)point of tangency between the marginal cost of capital curve and the investment opportunity schedule. B)upward sloping marginal cost of capital curve's intersection with a downward sloping investment opportunity schedule. C)downward sloping marginal cost of capital curve's intersection with a upward sloping investment opportunity schedule.

B is correct

The semi-strong form of efficient market hypothesis (EMH) asserts that: A)both public and private information is already incorporated into security prices. B)all public information is already reflected in security prices. C)past and future prices exhibit little or no relationship to another.

B is correct

The source of comparative advantage in the Heckscher-Ohlin model of trade is differences among countries in: A)technological advancement. B)relative scarcity of labor and capital. C)labor productivity.

B is correct

The trend line for a stock in an uptrend is constructed by drawing a straight line through the: A)highs. B)lows. C)periodic averages.

B is correct

The typical trade used by a merger arbitrage fund is: A)long position in acquirer, short position in firm being acquired. B)short position in acquirer, long position in firm being acquired. C)short positions in both the acquirer and the firm being acquired.

B is correct

The underlying instrument in a forward rate agreement is: A)a fixed-income security. B)an interest rate. C)an asset.

B is correct

Validity instructions tell you _____________ A.) How to trade B.) When to trade C.) How to settle a trade

B is correct

What is the appropriate test statistic for a hypothesis test concerning the *variance of a single* normally distributed population A.) T- Statistic B.) Chi square Statistic C.) F - Statistic

B is correct

When potential real GDP is less than actual real GDP, the economy is most likely experiencing: A)underemployment. B)inflation. C)recession.

B is correct

Which of the following statements most accurately describes the requirements for GIPS verification? A)Third-party verification is required for a firm to claim compliance with GIPS. B)Verification of GIPS compliance is recommended, but not required. C)A firm must select a representative set of composites for third-party GIPS verification.

B is correct

Which of the following will result from futures prices for a particular commodity being in contango? A)Negative collateral yield. B)Negative roll yield. C)Positive current yield.

B is correct

With respect to reporting investment results, Global Investment Performance Standards (GIPS) require a minimum of: A)ten years of historical performance. B)five years of historical performance. C)three years of historical performance.

B is correct

__________________ shareholders must receive any unpaid dividends before common shareholders may be paid and new dividends A.) Participating B.) Cumulative C.) participating preferred

B is correct

which of the following index weighing methods is most likely subject to a value tilt? A.) Equal weighting B.) Fundamental weighting C.) Market capitalization weighting

B is correct

The sample mean return of Bartlett Co. is 3% and the standard deviation is 6% based on 30 monthly returns. What is the confidence interval of a two tailed z-test of the population mean with a 5% level of significance? A)2.61 to 3.39. B)0.85 to 5.15. C)1.90 to 4.10.

B is correct The standard error of the sample is the standard deviation divided by the square root of n, the sample size. 6% / 301/2 = 1.0954%. The confidence interval = point estimate +/- (reliability factor × standard error) confidence interval = 3 +/- (1.96 × 1.0954) = 0.85 to 5.15

Assume that the exercise price of an option is $9, and the average market price of the stock is $12. Assuming 992 options are outstanding during the entire year, what is the number of shares to be added to the denominator of the Diluted EPS? A)744. B)248. C)992.

B is correct (992)($9) = $8928 $8928 / 12 = 744 992 − 744 = 248 new shares or [(12 − 9) / 12]992 = 248

A fiduciary call is a portfolio that is made up of: A)a call that is synthetically created from other instruments. B)a call option and a bond that pays the exercise price of the call at option expiration. C)a call option and a share of stock.

B is correct A fiduciary call combines a call option and a bond that pays the exercise price of the call at option expiration.

The most appropriate measure of the increase in the purchasing power of a portfolio's value over a given span of time is a(n): A)holding period return. B)real return. C)after-tax return.

B is correct A real return is adjusted for the effects of inflation and is used to measure the increase in purchasing power over time.

A firm recently hired Hal Crane, CFA, to be a supervisor in the firm. Crane has reviewed the procedures for complying with the Code and Standards in the company. It is Crane's belief that the procedures need revision in order to be effective. Crane must: A)make reasonable efforts to encourage the company to adopt an adequate compliance system. B)decline supervisory responsibilities in writing until the company adopts an adequate compliance system. C)exercise his supervisory responsibilities with the greater level of diligence required by the Code and Standards.

B is correct According to Standard IV(C) Responsibilities of Supervisors, if Crane believes the company's compliance procedures are not adequate, Crane should decline supervisory responsibilities in writing until an adequate system is adopted.

An equity index comprised of value stocks, identified by their price-to-earnings ratios, is best described as a: A)fundamental weighted index. B)style index. C)sector index.

B is correct An index of value stocks is an example of a style index. Sector indexes measure the performance of securities in specific industries or industry sectors. Fundamental weighting is used to weight indexes by a factor such as the size of the firms or economies represented in the index.

If an investor buys 100 shares of a $50 stock on margin when the initial margin requirement is 40%, how much money must she borrow from her broker? A)$2,000. B)$3,000. C)$4,000.

B is correct An initial margin requirement of 40% would mean that the investor must put up 40% of the funds and brokerage firm may lend the 60% balance. Therefore, for this example (100 shares) * ($50) = $5,000 total cost. $5,000 * 0.60 = $3,000.

Which of the following is most likely to cause an increase in aggregate demand? A.) Relative appreciation in the country's currency. B.) High capacity utilization rates. C.) An increase in the general price level.

B is correct As capacity utilization rates increase to high levels (typically 80% to 85%), business investment in plant and equipment increases, shifting the AD curve to the righ

Companies are required to report *segment data* under: A)IFRS but not U.S. GAAP. B)both IFRS and U.S. GAAP. C)U.S. GAAP but not IFRS.

B is correct Both IFRS and U.S. GAAP require companies to report segment data.

Compared to a term repurchase agreement, an overnight repurchase agreement is most likely to have a: A)lower repo rate and higher repo margin. B)lower repo rate and repo margin. C)higher repo rate and repo margin.

B is correct Both the repo rate and the repo margin tend to be higher for longer repo terms. Therefore an overnight repo should have a lower repo rate and a lower repo margin than a term (i.e., longer than overnight) repo.

In a commercial mortgage-backed security (CMBS), which of the following is an example of CMBS-level call protection? A)Yield maintenance charges. B)Residual tranche. C)Prepayment lockout.

B is correct Call protection in the context of a CMBS refers to protection against prepayment risk. Structuring a CMBS with a residual (equity or first-loss) tranche provides investors in the senior tranches with CMBS-level call protection. Prepayment lockout periods and yield maintenance charges are examples of loan-level call protection because they apply to the individual loans.

Credit derivatives are least accurately characterized as: A)contingent claims. B)forward commitments. C)insurance.

B is correct Credit derivatives are contingent claims and not forward commitments because their payoff depends on a future event taking place. Credit derivatives are essentially insurance against a credit event.

Deferred tax liabilities may result from: A)pretax income greater than taxable income due to permanent differences. B)pretax income greater than taxable income due to temporary differences. C)pretax income less than taxable income due to temporary differences.

B is correct Deferred tax liabilities result from temporary differences that cause pretax income and income tax expense (on the income statement) to be greater than taxable income and taxes due (on the firm's tax form). Temporary differences that cause pretax income to be less than taxable income are recognized as deferred tax assets. Permanent differences do not result in deferred tax items; instead they cause the effective tax rate to differ from the statutory tax rate.

When an economy dips into a recession, automatic stabilizers will tend to alter government spending and taxation so as to: A)reduce interest rates, thus stimulating aggregate demand. B)enlarge the budget deficit (or reduce the surplus). C)reduce the budget deficit (or increase the surplus).

B is correct During a recession unemployment is high, so the government will pay out more in unemployment compensation at the exact time that tax receipts from corporations and individuals are low. This will increase the size of the deficit and also maintain aggregate demand during recessionary periods.

Voluntary reporting of performance by hedge fund managers leads to: A)no appreciable bias in hedge fund index returns. B)an upward bias in hedge fund index returns. C)a downward bias in hedge fund index returns.

B is correct Empirical studies have shown that since hedge fund managers have the option to report performance results only funds with good results will report. Since funds with poor performance do not report their results, the results of hedge fund indexes will be biased upwards.

Austin Bruno, CFA, places a fill or kill, limit buy order at 92 for a stock. Bruno's order specifies: A)clearing and validity instructions. B)validity and execution instructions. C)execution and clearing instructions.

B is correct Fill or kill is a validity instruction as it indicates when the order can be filled (i.e. immediately or cancel the order). A limit buy order is an execution instruction as it indicates how the order should be filled (e.g. buy at $92 or less). Clearing instructions indicate how to settle the trade (i.e., how and when to transfer the cash and the security).

Financial leverage magnifies: A.) taxes. B.) earnings per share variability. C.) operating income variability.

B is correct Financial leverage results in the existence of required interest payments and, hence, increased earnings per share variability. Higher debt ratios, given a fixed asset base, result in a greater earnings per share variability. financial leverage = EBIT/ EBIT - interest payments

For two European put options that differ only in their time to expiration, which of the following is most accurate? The longer-term option: A)is worth more than the shorter-term option. B)can be worth less than the shorter-term option. C)is worth at least as much as the shorter-term option.

B is correct For European puts, it is possible that the longer term option can be less valuable than a shorter-term option.

Which of the following items for a financial services company is least likely to be considered an operating item on the income statement? A)Financing expenses. B)Income tax expense. C)Interest income.

B is correct For a financial services company, interest income, interest expense, and financing expenses are likely considered operating activities. For both financial and nonfinancial companies, income tax expense is a non-operating item that is reported within "income from continuing operations" as opposed to "operating profit" as with the other answer choices. Therefore, of the three choices, income tax expense is least likely to be considered an operating item.

The spot exchange rate for United States dollars per United Kingdom pound (USD/GBP) is 1.5775. If 30-day interest rates are 1.5% in the United States and 2.5% in the United Kingdom, and interest rate parity holds, the 30-day forward USD/GBP exchange rate should be: A)1.5621. B)1.5762. C)1.5788.

B is correct Forward USD/GBP = spot USD/GBP × (1 + U.S. interest rate) / (1 + UK interest rate) = 1.5775 × [(1 + 0.015/12) / (1 + 0.025/12)] = 1.5762

If a U.S. investor is forecasting that the yield spread between U.S. Treasury bonds and U.S. corporate bonds is going to widen, then which of the following is most likely to be CORRECT? A)The economy is going to expand. B)The economy is going to contract. C)The U.S. dollar will weaken.

B is correct If economic conditions are expected to get worse, then the probability that corporations may default increases and causes credit spreads to widen.

A trading system that matches buyers and sellers based on price and time precedence is most likely a(n): A)quote-driven market. B)order-driven market. C)brokered market.

B is correct In an order-driven market, buy orders and sell orders are matched up by the exchange according to order matching rules. In a quote-driven market, customers trade with dealers at bid and ask prices set by the dealers. In a brokered market, brokers organize trades among their clients.

A security that represents an equity share in a foreign firm and for which the voting rights are retained by the depository bank, is a(n): A)American depository share. B)unsponsored depository receipt. C)global registered share.

B is correct In an unsponsored DR, the depository bank retains the voting rights of the equity shares of the foreign firm. *In a sponsored DR, the investor in the DR has the voting rights*. For an American depository receipt, an American depository share is the underlying security that trades in the issuing firm's domestic market. A global registered share is an equity security that trades in the local currencies on stock exchanges around the world.

In periods of rising prices and stable or increasing inventory quantities, using the LIFO method for inventory accounting compared to FIFO will result in: A)higher cost of sales, lower income, lower cash flows, and lower inventory. B)higher cost of sales, lower income, higher cash flows, and lower inventory. C)lower cost of sales, higher income, identical cash flows, and lower inventory.

B is correct In periods of rising prices and stable or increasing inventory quantities, the LIFO method will result in higher cost of sales, lower taxes, lower net income, lower inventory balances, lower working capital, and higher cash flows.

Industry analysis is most likely to provide an analyst with insight about a company's: A)financial performance. B)pricing power. C)competitive strategy.

B is correct Industry analysis provides a framework for an analyst to understand a firm in relation to its competitive environment, which determines how much pricing power a firm has. Competitive strategy and financial performance are aspects of company analysis.

For a firm that uses the LIFO inventory cost method, a LIFO liquidation occurs if: A)sales decrease during a reporting period. B)inventory quantity decreases during a reporting period. C)the firm changes to a different inventory cost method.

B is correct LIFO liquidation occurs when the quantity of inventory decreases during a reporting period. In an increasing price environment this results in older, lower costs being included in COGS for the period.

A technical analysis chart that illustrates only the closing prices of a security on each trading day is best described as a: A)point and figure chart. B)line chart. C)bar chart.

B is correct Line charts are composed of closing prices for each trading day connected by lines. Bar charts require high and low prices for each trading day. Point and figure charts do not necessarily show each trading day's closing price.

A British hedge fund has a value of £100 million at the beginning of the year. The fund charges a 2% management fee based on assets under management at the end of the year and a 20% incentive fee with a soft hurdle rate of LIBOR + 2.5%. Incentive fees are calculated net of management fees. If the relevant LIBOR rate is 2.5% and the fund's value at the end of the year before fees is £120 million, the net return to investors is closest to: A)17.6%. B)14.1%. C)16.5%.

B is correct Management fee = £120.0 × 2.0% = £2.4 million. Gross value at end of year (given) = £120.0 million. Gross return = (£120.0 / £100.0) - 1 = 20.0%. The soft hurdle rate of 2.5% + 2.5% = 5.0% was exceeded. Incentive fee = (£120.0 - £100.0 - £2.4) × 20% = £3.52 million. Total fee = £2.40 + £3.52 = £5.92 million. Net of fee: £120.00 - £5.92 = £114.08 million. Net return = (£114.08 / £100.00) - 1 = 14.1%.

Which type of issuer is most likely to issue bonds by auction? A)Municipal. B)Sovereign. C)Corporate.

B is correct Many national governments use auctions to issue sovereign bonds. Corporate bonds are typically issued in an underwriting or private placement process while municipal bonds are typically issued in a negotiated or underwritten process.

Which of the following fixed income securities is classified as a money market security? A)Security issued six months ago that will mature in one year. B)Newly issued security that will mature in one year. C)Security issued 18 months ago that will mature in six months.

B is correct Money market securities have *original maturities* of one year or less. Fixed income securities originally issued with maturities longer than one year are classified as capital market securities.

Which of the following statements best describes the concept of negative convexity in bond prices? As interest rates: A)fall, the bond's price increases at an increasing rate. B)fall, the bond's price increases at a decreasing rate. C)rise, the bond's price decreases at a decreasing rate.

B is correct Negative convexity occurs with bonds that have prepayment/call features. As interest rates fall, the borrower/issuer is more likely to repay/call the bond, which causes the bond's price to approach a maximum. As such, the bond's price increases at a decreasing rate as interest rates decrease.

A company acquires an intangible asset for $100,000 and expects it to have a value of $20,000 at the end of its 5-year useful life. If the company amortizes the asset using the double-declining balance method, amortization expense in year 4 of the asset's useful life is closest to: A)$6,910. B)$1,600. C)$8,640.

B is correct Net book value at the end of year 3 is $100,000 × 3/5 × 3/5 × 3/5 = $21,600. DDB amortization in year 4 of 2/5 × $21,600 = $8,640 would amortize the asset below its salvage value, so amortization expense is the remaining $1,600 that will amortize net book value to $20,000.

A firm has an expected dividend payout ratio of 50 percent, a required rate of return of 18 percent, and an expected dividend growth rate of 3 percent. The firm's price to earnings ratio (P/E) is: A)2.78. B)3.33. C)6.66.

B is correct P/E = .5 / (18%-3%) = 3.33.

A firm's earnings are most likely to be cyclical if: A)the firm operates in a growth industry. B)the firm produces luxury items. C)most of the firm's costs depend on its level of output.

B is correct Producers of luxury items tend to have cyclical earnings because consumers typically decrease their purchases of these items during economic recessions. The earnings of firms with high percentages of variable costs are not as likely to be cyclical as those of firms with high percentages of fixed costs (i.e., high operating leverage). A growth industry has demand that is strong enough that earnings remain relatively unaffected by the business cycle.

The most appropriate tool to use for intermarket analysis of two different asset classes is a: A)moving average convergence/divergence chart. B)relative strength chart. C)stochastic oscillator.

B is correct Relative strength charts are useful for intermarket analysis because they illustrate the performance of one asset, sector, or index relative to another. Momentum indicators, such as stochastic oscillators and MACD oscillators, are generally used to analyze individual markets.

Goldberg Inc. produces and sells electronic equipment. Which of the following inventory costs is most likely to be recognized as an expense on Goldberg's financial statements in the period incurred? A)Freight costs on inputs. B)Selling cost. C)Conversion cost.

B is correct Selling costs are expensed in the period incurred since they result in no future benefit (i.e. the inventory has been sold). Conversion costs and freight costs add value in assisting in the future sale of the related inventory. Therefore, these costs are not recognized until the inventory is ultimately sold.

Which of the following is *least likely* to contribute to effective risk governance? A)The risks an organization chooses to pursue, limit, or avoid should reflect the overall goals of the organization. B)Decision-makers throughout an organization should consider risk governance a responsibility. C)An organization should identify its overall risk tolerance and establish a framework for oversight of risk management.

B is correct Senior management should be responsible for risk governance, which includes determining the organization's risk tolerance and its strategy for managing risks in line with the organization's goals.

Structural subordination means that a parent company's debt: A)ranks pari passu with a subsidiary's debt with respect to the subsidiary's cash flows. B)has a lower priority of claims to a subsidiary's cash flows than the subsidiary's debt. C)has a higher priority of claims to a subsidiary's cash flows than the subsidiary's debt.

B is correct Structural subordination means that cash flows from a subsidiary are used to pay the subsidiary's debt before they may be paid to the parent company to service its debt. As a result, parent company debt is effectively subordinate to the subsidiary's debt.

The point where technicians expect a substantial increase in the demand for a stock to occur is called a: A.) break‐out point. B.) support level. C.) resistance level.

B is correct Support and resistance levels. Most stock prices remain relatively stable and fluctuate up and down from their true value. The lower limit to these fluctuations is called a support level - the price range where a stock appears cheap and attracts buyers. The upper limit is called a resistance level - the price range where a stock appears expensive and initiates selling.

An analyst has gathered the following expenditure information for three different firms, each of which has a sales level of $4 million. Costs for firms under consideration (in millions) -------------------Firm A -------Firm B ----------Firm C Variable Costs----$2.00 -------$2.60-----------$2.40 Fixed Costs ------$1.00 --------$1.30 -----------$1.40 Interest Expense -$0.20 -------$0.00 ----------$0.20 Which firm has the highest degree of operating leverage (DOL)?

B is correct The DOL for the three companies is as follows: DOL = (Total Revenue - Total Variable Costs) / (TR - TVC - Total Fixed Costs) Firm A: ($4.00 - $2.00) / ($4.00 - $2.00 - $1.00) = 2 Firm B: ($4.00 - $2.60) / ($4.00 - $2.60 - $1.30) = 14 Firm C: ($4.00 - $2.40) / ($4.00 - $2.40 - $1.40) = 8

Which of the following statements is most accurate with regard to Global Investment Performance Standards (GIPS)? A)GIPS require managers to include all actual fee-paying and non-fee-paying discretionary portfolios in composites defined according to similar strategy and/or investment objective. B)GIPS are ethical principles that firms can follow voluntarily where local or country-specific law, regulation, or industry standards may not exist for investment performance presentation. C)Firms that adopt GIPS must initially show GIPS-compliant history for a minimum of ten years, or since inception of the firm or composite if in existence less than ten years.

B is correct The GIPS standards: (1) do not require managers to include non-fee-paying accounts in composites, and (2) require five years (or since inception) of GIPS compliant history in a firm's initial GIPS-compliant performance presentation.

Which of the following financial ratios is least likely to be affected by classification of deferred taxes as a liability or equity? A)Leverage ratio. B)Return on assets (ROA). C)Return on equity (ROE).

B is correct The ROA will not be affected by the classification of the deferred taxes. The total assets will remain the same regardless of whether the deferred taxes are classified as a liability or equity. Return on equity and the leverage ratio (assets/equity) would both be affected.

The special purpose entity (SPE) in a securitization is: A)a subsidiary of the seller. B)an entity independent of the seller. C)a joint venture partner of the seller.

B is correct The SPE in a securitization must be a legal entity independent of the seller so that the seller's creditors do not have a claim against the securitized assets.

Which of the following option positions is said to be a long position? A)Writer of a put option. B)Buyer of a put option. C)Writer of a call option.

B is correct The buyer of an option (either a call or put) is said to be long the option and the writer of an option is said to be short the option. Note that with put options, the long (put option holder) benefits when the price of the underlying asset decreases, while the short (put option writer) benefits when the price of the underlying asset increases. We say that a put buyer is long the option but has short exposure to the underlying asset price.

B is correct The duration of a bond portfolio is the weighted average of the durations of the bonds in the portfolio. The weights are the value of each bond divided by the value of the portfolio: portfolio duration = 8 × (1050 / 3000) + 6 × (1000 / 3000) + 4 × (950 / 3000) = 2.8 + 2 + 1.27 = 6.07.

In contrast with most asset-backed securities (ABS), a collateralized debt obligation (CDO): A)has senior and subordinate tranches. B)employs a collateral manager. C)is issued through a special purpose vehicle.

B is correct The feature that distinguishes a CDO is that it has a collateral manager who buys and sells securities in the collateral pool to generate cash to meet the CDO's obligations.

The spot exchange rate for CHF/EUR is 0.8342 and the 1-year forward quotation is −0.353%. The 1-year forward exchange rate for EUR/CHF is closest to: A)1.2022. B)1.2029. C)0.8313.

B is correct The forward rate for CHF/EUR is 0.8342 × (1 − 0.00353) = 0.8313. The 1-year forward EUR/CHF exchange rate is 1 / 0.8313 = 1.2030.

The interbank funds market is most accurately described as: A.) trading of negotiable certificates of deposit. B.) unsecured short‐term loans from one bank to another. C.) banks' borrowing of reserves from the central bank.

B is correct The interbank funds market refers to short-term unsecured loans between banks. It does not refer to trading of negotiable certificates of deposit. Borrowing from the central bank is said to occur in the central bank funds market.

Which of the following statements about floating-rate notes is most accurate? A)The coupon payment on a floating-rate note at each reset date is typically based on LIBOR as of that date. B)Floating-rate notes have built-in floors, while inverse floating-rate notes have built-in caps. C)Inverse floating-rate notes are attractive to investors who expect interest rates to rise, while floating-rate notes are attractive to investors who expect interest rates to fall.

B is correct The lowest possible reference rate is zero. If this occurs, the coupon on a floating-rate note cannot go lower than its quoted margin. Hence, the quoted margin is a floor coupon for a floating-rate note. The coupon on an inverse floater is determined by a formula such as "15% - 1.5 × reference rate." If the reference rate goes to zero, the coupon on this inverse floater can go no higher than 15%.

Which probability rule determines the probability that two events will both occur? A)The total probability rule. B)The multiplication rule. C)The addition rule.

B is correct The multiplication rule is used to determine the joint probability of two events. The addition rule is used to determine the probability that at least one of two events will occur. The total probability rule is utilized when trying to determine the unconditional probability of an event.

Which of the following statements regarding plain-vanilla interest rate swaps is least accurate? ----------------------------------------------------- A)The time frame covered by the swap is called the tenor of the swap. B)In a swap contract, the counterparties usually swap the notional principal. C)The settlement dates are when the interest payments are to be made.

B is correct The notional principal is generally not swapped, as it is usually the same for both parties in the swap deal.

When considering convertible preferred stock which of the following components of the earnings per share (EPS) equation needs to be adjusted to calculate diluted earnings per share? A)The numerator. B)The numerator and denominator. C)The denominator.

B is correct The numerator will increase because earnings available to the common shareholder are increased by the reduction in preferred dividends. The denominator increases because the weighted average number of shares increases upon conversion of the preferred stock.

The spot exchange rate is 0.6243 USD/GBP and the 1-year forward rate is quoted as 3.016%. The 1-year forward exchange rate for USD/GBP is closest to: A)0.6054. B)0.6431. C)0.6544.

B is correct The one year forward rate is 0.6243 × (1 + 0.03016) = 0.6431.

The payoff of a call option on a stock at expiration is equal to: A)the maximum of zero and the exercise price minus the stock price. B)the maximum of zero and the stock price minus the exercise price. C)the minimum of zero and the stock price minus the exercise price.

B is correct The payoff on a call option on a stock is Max (0, S - X).

The least likely cause of a decrease in aggregate demand is: A.) higher taxes. B.) a weak domestic currency. C.) a fall in capacity utilization.

B is correct The relationship between aggregate demand and domestic currency is **Inverse**

An Elliott wave theorist who forecasts prices based on Fibonacci ratios is most likely to predict that a wave will be: A)six-elevenths the size of the previous wave. B)five-eighths the size of the previous wave. C)four-ninths the size of the previous wave.

B is correct The sequence of Fibonacci numbers is 0, 1, 1, 2, 3, 5, 8, 13... . Five-eighths is a Fibonacci ratio.

In applying the treasury stock method, if warrants allow the purchase of 1 million shares at $42 per share when the average price is $56 per share, how many shares will be added to the firm's weighted average number of shares outstanding? A)1,000,000. B)250,000. C)420,000.

B is correct The treasury stock method would allow the 1 million additional shares to be partially offset by the number of shares that could be repurchased with the amount of money received for those shares. In this case, the 1 million shares issued would be offset by (1,000,000 × $42 / $56) or 750,000 shares.

Risk management within an organization should most appropriately consider: A)financial risks independently of non-financial risks. B)interactions among different risks. C)internal risks independently of external risks.

B is correct The various financial and non-financial risks interact in many ways. A risk management process should consider these interactions among risks rather than treating them each in isolation.

Octagon Advisors believes that the market is semi-strong efficient. The firm's portfolio managers most likely will use: A)an enhanced indexing strategy that relies on trading patterns. B)passive portfolio management strategies. C)active portfolio management strategies.

B is correct If the market is semi-strong efficient, portfolio managers should use passive management because neither technical analysis nor fundamental analysis will generate positive abnormal returns on average over time.

A country's central bank announces a monetary policy goal of a stable exchange rate with the euro, which it defines as deviations of no more than 3% from its current exchange rate of 2.5000. The country's exchange rate regime is best described as a: A)crawling band. B)target zone. C)fixed peg.

B is correct This exchange rate regime is best described as a target zone, or a system of pegged exchange rates within horizontal bands. A target zone allows wider exchange rate fluctuations than a conventional fixed peg arrangement, which typically limits the permitted range to within 1% of the pegged exchange rate. Management of exchange rates within crawling bands allows the percentage deviation from the pegged exchange rate to increase over time.

Rachel, has a patient who is complaining of severe abdominal pain. Based on an examination and the results from laboratory tests, Rachel states the following diagnosis hypothesis: Ho: Appendicitis, HA: Not Appendicitis. Dr. Mosby removes the patient's appendix and the patient still complains of pain. Subsequent tests show that the gall bladder was causing the problem. By taking out the patient's appendix, Dr. Mosby: Click your answer choice below: A.) made a Type I error. B.) made a Type II error. C.) is correct.

B is correct This statement is an example of a Type II error, which occurs when you fail to reject a hypothesis when it is actually false.

A firm determines that inventory of manufactured goods with a cost of €10 million has a net realizable value of €9 million and writes down its carrying value to this amount. One period later, the firm determines that the net realizable value of this inventory has increased to €11 million. Under IFRS, the carrying value of this inventory: A)may be revalued up to €11 million. B)may be revalued up to €10 million. C)must remain valued at €9 million.

B is correct Under IFRS, inventory is measured at the lower of cost or net realizable value. Inventory that has been written down can later be revalued upward if its net realizable value recovers, but only to the extent that reverses the writedown (i.e., no higher than cost). Under U.S. GAAP, inventory that has been written down may not be revalued upward.

Unemployment compensation is an example of: A)an automatic monetary policy stabilizer. B)an automatic fiscal policy stabilizer. C)a discretionary fiscal policy stabilizer.

B is correct Unemployment compensation automatically rises and falls with the business cycle, therefore it is an example of an automatic fiscal policy stabilizer.

If a firm's growth rate is 12% and its dividend payout ratio is 30%, its current return on equity (ROE) is closest to: A)40.00%. B)17.14%. C)36.00%.

B is correct g = (RR)(ROE) g / RR = ROE 0.12 / (1 - 0.30) = 0.12 / 0.70 = 0.1714 or 17.14%

In a securitization, the collateral is initially sold by the: A.) issuer. B.) depositor. C.) underwriter.

B is correct . In a securitization, the loans or receivables are initially sold by the depositor to the special purpose entity (SPE) that uses them as collateral to issue the ABS.

What is the net income of a firm that has a return on equity of 12%, a leverage ratio of 1.5, an asset turnover of 2, and revenue of $1 million? A)$360,000. B)$40,000. C)$36,000.

B is correct ROE = (net profit margin)(asset turnover)(leverage ratio) Solving for the net profit margin yields: 0.12 = (net profit margin) × (2) × (1.5) 0.04 = (net profit margin) Recognizing that the net profit margin is equal to net income / revenue we can substitute that relationship into the above equation and solve for net income: 0.04 = net income / revenue = net income / $1,000,000 $40,000 = net income.

***know for the exam*** Statement #1 - Each line item is expressed as a percentage of its base-year amount. Statement #2 - Each line item of the income statement is expressed as a percentage of revenue and each line item of the balance sheet is expressed as a percentage of ending total assets. Statement #1 is a example of A.) Vertical analysis B.) Horizontal analysis

B is correct 1 = Horizontal analysis 2 = vertical analysis

A Fiscal Budget Deficit occurs when occurs when A.) Policy rate < neutral rate B.) Government spending > Tax revenue C.) Policy rate > neutral rate D.) Government spending < Tax revenue

B is correct A -- is Expansionary monetary policy C.) -- is contractionary monetary policy D.) -- is fiscal budget surplus Policy rate is the Central Bank Rate

The period of time within which a hedge fund must fulfill a redemption request is the: A)withdrawal period. B)notice period. C)lockup period.

B is correct A notice period, typically 30 to 90 days, is the amount of time a fund has after receiving notice of a redemption request to fulfill the redemption request. A lockup period is a minimum length of time before an investor may redeem shares or make withdrawals.

A perfectly competitive firm will not expand its output beyond the quantity where: A)its marginal revenue is positive. B)the market price is equal to its marginal cost. C)the marginal cost is greater than marginal revenue.

B is correct A perfectly competitive firm will tend to expand its output so long as the market price is greater than marginal cost. In the short term and long term, profit is maximized when P = MC.

Using put-call parity, it can be shown that a synthetic European put can be created by a portfolio that is: A)long the stock, short the call, and short a pure discount bond that pays the exercise price at option expiration. B)short the stock, long the call, and long a pure discount bond that pays the exercise price at option expiration. C)short the stock, long the call, and short a pure discount bond that pays the exercise price at option expiration.

B is correct A short position in the stock combined with a long call and lending the present value of the exercise price will replicate the payoffs on a put at option expiration.

A mechanism to discipline financial reporting quality for securities that trade in the United States that is not typically imposed on security issuers elsewhere is that: A)the firm must provide a signed statement by the person responsible for preparing the financial statements. B)management must attest to the effectiveness of the firm's internal controls. C)financial statements must be audited by an independent party.

B is correct A signed management statement about the effectiveness of the firm's internal controls is required by U.S. regulators for securities that trade in the U.S., but not elsewhere. The other two items are typically required by securities regulators worldwide.

Monthly Gross Domestic Product (GDP) figures from 1990-2000 are an example of: A)systematic data. B)time-series data. C)cross-sectional data.

B is correct A time-series is a group of observations taken at specific and equally spaced points in time. Cross-sectional data are observations taken at a single point in time.

Which of the following situations will most likely require a company to record a valuation allowance on its balance sheet? A)To report depreciation, a firm uses the double-declining balance method for tax purposes and the straight-line method for financial reporting purposes. B)A firm is unlikely to have future taxable income that would enable it to take advantage of deferred tax assets. C)A firm has differences between taxable and pretax income that are never expected to reverse.

B is correct A valuation allowance is a contra account (offset) against deferred tax assets that reflects the likelihood that the deferred tax assets will never be realized. If a firm is unlikely to have future taxable income, it would be unlikely to ever use its deferred tax assets, and therefore must record a valuation allowance.

In the preparation of a research report, a CFA Institute member may emphasize certain matters, touch briefly on others, and omit some altogether: A)provided that the analyst both has a reasonable basis and is unconstrained by the Mosaic theory. B)provided that the analyst has a reasonable basis for his or her actions. C)under no circumstances.

B is correct According to Standard V(B), the analyst must use reasonable judgment in identifying relevant factors when communicating with clients and prospects. The Mosaic theory does not apply here.

ABC --> 300 DEF --> 250 GHI --> 200 JKL --> 150 MNO --> 100 PQR --> 50 The industry's four-company concentration ratio is closest to: A.) 71%. B.) 86%. C.) 95%.

B is correct B is correct. The top four companies in the industry comprise 86 percent of industry sales: (300 + 250 + 200 + 150)/(300 + 250 + 200 + 150 + 100 + 50) = 900/1050 = 86%.

Return and risk data on alternative investments may be affected by backfill bias if: A)data only include currently existing firms. B)a firm's historical returns are included when it is added to an index. C)the incorrect distribution is used to model volatility.

B is correct Backfill bias refers to bias introduced by including the previous performance data for firms added to a benchmark index.

If a bank needs to borrow funds from the Federal Reserve to fund a temporary shortage in reserves, it would borrow funds at the: A)federal funds rate. B)discount rate. C)prime rate.

B is correct Banks are able to borrow from the Fed at the discount rate. The federal funds rate is the interest rate banks charge other banks to borrow reserves from other banks. The prime rate is the rate that commercial banks charge their best customers.

The exchange rate for Japanese yen (JPY) per euro (EUR) changes from 98.00 to 103.00 JPY/EUR. How has the value of the EUR changed relative to the JPY in percentage terms? A)Depreciated by 4.9%. B)Appreciated by 5.1%. C)Appreciated by 4.9%.

B is correct Because the exchange rates are quoted with the EUR as the base currency, the percentage change is simply 103.00 / 98.00 − 1 = 5.1%. The increase in the quoted JPY/EUR exchange rate means it now requires 5.1% more JPY to purchase one EUR. Thus, the EUR has appreciated by 5.1% against the JPY.

Which of the following is NOT an advantage of using price-to-book value (PBV) multiples in stock valuation? A)PBV ratios can be compared across similar firms if accounting standards are consistent. B)Book values are very meaningful for firms in service industries. C)Book value is often positive, even when earnings are negative.

B is correct Book values are NOT very meaningful for firms in service industries.

**know for the exam** an investor purchases a a stock for $85. exactly one year later the company pays a dividend of $2 per share. this is followed by two more annual dividends of $2.25 and $2.75 in successive years. upon receiving the third dividend, the investor sells the share for $100. the money weighted rate of return on this investment is closest to? A.) 7.97% B.) 8.15% C.) 8.63%

B is correct CFo = -85 CF1 = 2 CF2 = 2.25 CF3 = 102.75 calculate for the IRR

Which of the following economic indicators is classified as a leading indicator for the United States economy? A)Industrial production. B)Index of consumer expectations. C)Average duration of unemployment.

B is correct Consumer expectations are a leading indicator. Industrial production is a coincident indicator. Average duration of unemployment is a lagging indicator.

An analyst gathered the following information about a company: - Taxable income = $100,000. - Pretax income = $120,000. - Current tax rate = 20%. Assuming the difference between taxable income and pretax income will reverse in the future, the effect these events on the company's financial statements will be to report income tax expense of: A)$22,000 with no change in deferred tax items. B)$24,000 and an addition to deferred tax liabilities of $4,000. C)$24,000 and a decrease in deferred tax assets of $4,000.

B is correct Deferred tax liability = (100,000-120,000) × 0.2 = - 4,000 Tax expense = current tax rate × taxable income + change in deferred tax liability 0.2 × 100,000 + 4,000 = 24,000

Duration and convexity are most likely to produce more accurate estimates of interest rate risk when the term structure of yield volatility is: A)upward sloping. B)flat. C)downward sloping.

B is correct Duration and convexity assume the yield curve shifts in a parallel manner

B is correct Expansionary fiscal policy increases a budget deficit or decreases a budget surplus. Contractionary fiscal policy decreases a budget deficit or increases a budget surplus.

Which of the following is the most likely result of a central bank's shift to an expansionary monetary policy? A)Interest rates increase. B)Exports increase. C)Domestic currency appreciates.

B is correct Expansionary monetary policy decreases interest rates. This should cause the domestic currency to depreciate, which should increase foreign demand for the country's exports.

The effects that the acceptance of a project may have on other firm cash flows are best described as: A)opportunity costs. B)externalities. C)pure plays.

B is correct Externalities refer to the effects that the acceptance of a project may have on other firm cash flows. Cannibalization is one example of an externality.

Financial leverage magnifies: A)operating income variability. B)earnings per share variability. C)taxes.

B is correct Financial leverage results in the existence of required interest payments and, hence, increased earnings per share variability. Higher debt ratios, given a fixed asset base, result in a greater earnings per share variability. Operating income is based on the products and assets of the firm and not on the firm's financing

Nominal GDP for the year 20X7 is $784 billion and real GDP is $617 billion. If the base period for the GDP deflator is 20X1, the annual rate of increase in the GDP deflator since the base year is closest to: A)3.5%. B)4.0%. C)4.5%.

B is correct GDP deflator = $784 billion / $617 billion × 100 = 127.07. Annual rate of increase = (127.07 / 100)^1/6 - 1 = 0.0407 = 4.07%.

Global depository receipts are most likely issued: A)in the United States and denominated in U.S. dollars. B)outside the issuer's home country and denominated in U.S. dollars. C)outside the issuer's home country and denominated in the exchange's home currency.

B is correct Global depository receipts are issued outside the U.S. and the issuer's home country and are most often denominated in U.S. dollars. Depository receipts issued in the United States and denominated in U.S. dollars are called American depository receipts. Global registered shares are denominated in the home currencies of the exchanges on which they trade.

Which of the following is least likely one of the general requirements for financial statements under IFRS? A)No offsetting of income against expenses unless a standard permits or requires it. B)Statements should be prepared at least quarterly. C)Statements should be prepared under a going concern assumption.

B is correct IFRS require reporting at least annually. The other two choices are requirements included in IAS No. 1.

An analyst gathers the following information about a firm: Last in, first out (LIFO) inventory = $10,000 Beginning LIFO reserve = $2,500 Ending LIFO reserve = $4,000 LIFO cost of goods sold = $15,000 LIFO net income = $1,500 Tax rate is 40% To convert the financial statements to a FIFO basis, the amount the analyst should add to the stockholders' equity is closest to: A)$4,000. B)$2,400. C)$2,800.

B is correct If the firm had used FIFO inventory cost, tax liability would be higher by (LIFO reserve × tax rate) and retained earnings would be higher by [LIFO reserve × (1 − tax rate)]. (LIFO reserve)(1 − t) = $4,000(1 − 0.4) = $2,400. (

An analyst decides to select 10 stocks for her portfolio by placing the ticker symbols for all the stocks traded on the New York Stock Exchange in a large bowl. She randomly selects 20 stocks and will put every other one chosen into her 10-stock portfolio. The analyst used: A)stratified random sampling. B)simple random sampling. C)dual random sampling.

B is correct In simple random sampling, each item in the population has an equal chance of being selected. The analyst's method meets this criterion. Stratified random sampling is when a population is broken into subcategories

What is the risk measure associated with the CML? A)Beta. B)Standard deviation. C)Market risk.

B is correct In the context of the CML, the measure of risk (x-axis) is total risk, or standard deviation.

With a one-tier board structure: A)independent directors determine company strategy. B)both executives and non-executives can serve on the board of directors. C)senior managers determine corporate strategy.

B is correct Independent directors and senior managers both serve on a single board with a one-tier board structure and are jointly responsible for determining corporate strategy.

The CFA logo may be used as a certification mark: A)next to a company logo. B)on a personal business card. C)on a company website.

B is correct Individual charterholders may use the CFA logo on a business card or letterhead. The CFA logo may not be used by a company or firm.

Bruce Johansen, CFA, is fully invested in the market portfolio. Johansen desires to increase the expected return from his portfolio. According to capital market theory, Johansen can meet his return objective by: A)owning the risky market portfolio and lending at the risk-free rate. B)borrowing at the risk-free rate to invest in the risky market portfolio. C)allocating a higher proportion of the portfolio to higher risk assets.

B is correct Investing on margin in the market portfolio will increase both risk and expected returns. This strategy would be mean-variance efficient. Other strategies such as shifting a portion of total funds to higher risk assets would achieve the higher return goal but would leave the portfolio below the CML and thus would not be an optimal strategy.

***know for the exam*** Investors who are less risk averse will have what type of indifference curves for risk and expected return? A)Inverted. B)Flatter. C)Steeper.

B is correct Investors who are less risk averse will have flatter indifference curves, meaning they are willing to take on more risk for a slightly higher return. Investors who are more risk averse require a much higher return to accept more risk, producing steeper indifference curves.

Which of the following measures produces the same portfolio rankings as the Sharpe ratio but is stated in percentage terms? A)Treynor measure. B)M-squared. C)Jensen's alpha.

B is correct M-squared measures the excess return of a leveraged portfolio relative to the market portfolio and produces the same portfolio rankings as Sharpe ratio.

B is correct Management fee = $150.0 × 1.0% = $1.5 million Net value at end of year after hedge fund fees = $55.5 + $104.5 = $160.0 million Incentive fee = ($160.0 - $150.0) × 10% = $1.0 million Total fees = $1.5 + $1.0 = $2.5 million Net of fees: $160.0 - $2.5 = $157.5 million Net return = ($157.5 / $150.0) - 1 = 5.0%

With regard to a firm's financial reporting quality, an analyst should most likely interpret as a warning sign a focus by management on an increase in the firm's: A)cash from operations. B)pro forma earnings. C)asset turnover ratios.

B is correct One potential warning sign of low-quality financial reporting is management's focus on "pro forma" or non-GAAP measures of earnings. Increases in operating cash flows or asset turnover ratios are not typically viewed as warning signs of poor financial reporting quality.

Nelson, Inc. has fixed financing costs of $3 million, fixed operating costs of $5 million, and variable costs of $2.00 per unit. If the price of Nelson's product is $4.00, Nelson's operating breakeven quantity of sales is: A)4.0 million units. B)2.5 million units. C)1.0 million units.

B is correct Operating breakeven quantity = fixed operating costs / (price - variable cost per unit) = $5 million / ($4.00 - $2.00) = 2,500,000 units.

Income Statement Sales = 3000 Cost of Goods Sold = (1000) -------------------------------- Gross Profit = 2000 SG&A = 500 Interest Expense = 151 EBT = 1349 Taxes = (30%)405 Net Income = 944 What is the operating profit margin? A)0.45. B)0.50. C)0.67.

B is correct Operating profit margin = (EBIT / sales) = (1,500 / 3,000) = 0.5

Preference shares will have the most risk for the investor if the shares are: A)callable and cumulative. B)callable and non-cumulative. C)non-callable and non-cumulative.

B is correct Preference shares (preferred stock) has more risk for the investor if they are non-cumulative than if they are cumulative, because with cumulative preference shares the firm must pay the holder any omitted dividends before it can pay any dividends to common shareholders. Callable shares have more risk for the investor than non-callable shares because the call option limits their potential for price appreciation.

The stakeholder theory of corporate governance is primarily focused on: A)the interests of various stakeholders rather than the interests of shareholders. B)resolving the competing interests of those who manage companies and other groups affected by a company's actions. C)increasing the value a company.

B is correct Resolving the conflicting interests of both shareholders and other stakeholders is the focus of corporate governance under stakeholder theory. Shareholders are among the groups whose interests are considered under stakeholder theory.

Typically, forward commitments are made with respect to all the following EXCEPT: A)bonds. B)equities. C)inflation.

A distribution with a mode of 10 and a range of 2 to 25 would most likely be: A)normally distributed. B)positively skewed. C)negatively skewed.

B is correct The distance to the left from the mode to the beginning of the range is 8. The distance to the right from the mode to the end of the range is 15. Therefore, the distribution is skewed to the right, which means that it is positively skewed.

*** Learn for the test **** An investor buys a pure-discount note that matures in 146 days for $971. The bond-equivalent yield is closest to: A)1.2%. B)7.5%. C)3.0%.

B is correct The equivalent add-on return the investor earns for the 146-day holding period is $1,000 / $971 - 1 = 0.0299 = 2.99%. The bond-equivalent yield is (365 / 146) × 2.99% = 7.47%.

The experience curve, which illustrates the cost per unit relative to output: A)slopes upward. B)slopes downward. C)slopes upward in the early years and downward in the later years.

B is correct The experience curve, which shows the cost per unit relative to output, slopes downward because of increases in productivity and economies of scale, especially in industries with high fixed costs.

The first step in developing a security market index is choosing the index's: A)constituent securities. B)target market. C)weighting method.

B is correct The first decision that must be made is choosing the target market the index will represent. Only then can the index provider determine which constituent securities should be included and which weighting scheme is most appropriate to measure the target market's returns.

To determine whether monetary policy is expansionary or contractionary, an analyst should compare the central bank's policy rate to the: A)trend rate of real growth. B)neutral interest rate. C)target inflation rate.

B is correct The neutral interest rate is the sum of the trend rate of real economic growth and the target inflation rate. Monetary policy is expansionary if the policy rate is less than the neutral interest rate and contractionary if the policy rate is greater than the neutral interest rate.

------------------------------------(Snack ---- Bread) Price per package --------------> $2.00 ------$2.50 Variable cost per package------> $1.00 ------ $1.30 Fixed operating costs ---------->$25,000 -----$30,000 Fixed financing costs ----------->$10,000-------$10,000 Compared to the snack cakes division, the operating breakeven quantity for the bread division is: A)less. B)the same. C)greater.

B is correct The operating breakeven quantity for the snack cakes division is $25,000/($2.00 - $1.00) = 25,000. The operating breakeven quantity for the bread division is $30,000/($2.50 - $1.30) = 25,000.

**know for the exam** The purpose of composites in a GIPS-compliant performance presentation is to: A)clearly distinguish the entity that is presented to the public as a GIPS-compliant firm. B)provide information about a firm's performance in various asset classes. C)present overall firm performance in a single statistic that is comparable across firms.

B is correct The purpose of composites is to give clients and prospects information about a firm's past performance managing investments in various asset classes.

An analyst gathered the following data for the Parker Corp. for the year ended December 31, 2005: -------------------------------------------------- EPS (2005)--> = $1.75 Dividends (2005) ---> = $1.40 Beta (Parker) ---> = 1.17 Long-term bond rate ---> = 6.75% Rate of return S&P 500 ---> = 12.00% -------------------------------------------------- The firm is expected to continue their dividend policy in future. If the long-term growth rate in earnings and dividends is expected to be 6%, the forward P/E ratio for Parker Corp. will be: A)12.31. B)11.61. C)21.54.

B is correct The required rate of return on equity for Parker will be 12.89% = 6.75% + 1.17(12.00% - 6.75%) and the firm pays 80% (1.40 / 1.75) of its earnings as dividends. Forward P/E ratio = 0.80 / (0.1289 - 0.0600) = 11.61 Where r = required rate of return on equity, gn = growth rate in dividends (forever).

Use the following information and the dividend discount model to find the value of GoFlower, Inc.'s, common stock. Last year's dividend was $3.10 per share. The growth rate in dividends is estimated to be 10% forever. The return on the market is expected to be 12%. The risk-free rate is 4%. GoFlower's beta is 1.1. A)$26.64. B)$121.79. C)$34.95.

B is correct The required return for GoFlower is 0.04 + 1.1(0.12 - 0.04) = 0.128 or 12.8%. The expect dividend is ($3.10)(1.10) = $3.41. GoFlower's common stock is then valued using the infinite period dividend discount model (DDM) as ($3.41) / (0.128 - 0.10) = $121.79.

Tapley Acquisition, Inc., is considering the purchase of Tangent Company. The acquisition would require an initial investment of $190,000, but Tapley's after-tax net cash flows would increase by $30,000 per year and remain at this new level forever. Assume a cost of capital of 15%. Should Tapley buy Tangent? A)No, because k > IRR. B)Yes, because the NPV = $10,000. C)Yes, because the NPV = $30,000.

B is correct This is a perpetuity. PV = PMT / I = 30,000 / 0.15 = 200,000 200,000 - 190,000 = 10,000

The choice of perpetual versus periodic inventory system is most likely to result in different values for gross profit when the inventory valuation method used is: A)specific identification. B)last in, first out. C)first in, first out.

B is correct Under the LIFO or weighted average cost inventory valuation methods, perpetual and periodic inventory accounting systems can result in different values for cost of sales, ending inventory, and gross profit. Under FIFO or specific identification, these values are the same for a periodic or perpetual system.

Ken James has been an independent financial advisor for 15 years. He received his CFA Charter in 1993, but did not feel it helped his business, so he let his dues lapse this year. He still has several hundred business cards with the CFA designation printed on them. His promotional materials state that he received his CFA designation in 1993. James: A)must cease distributing the cards with the CFA designation and the existing promotional materials. B)must cease distributing the cards with the CFA designation, but can continue to use the existing promotional materials. C)can continue to use the existing promotional materials, and can use the cards until his supply runs out—his new cards cannot have the designation.

B is correct Use of the CFA designation must be stopped immediately, however, the receipt of the Charter is a matter of fact.

The condition that occurs when a company disburses cash too quickly, stretching the company's cash reserves, is best described as a: A)liquidity premium. B)pull on liquidity. C)drag on liquidity.

B is correct When cash payments are made too quickly, the condition is known as a pull on liquidity. A drag on liquidity occurs when cash inflows lag.

If prices are decreasing, the best estimates of inventory and cost of goods sold from an analyst's point of view are provided by: A)LIFO inventory and FIFO cost of goods sold. B)FIFO inventory and LIFO cost of goods sold. C)FIFO inventory and FIFO cost of goods sold.

B is correct Whether prices are increasing or decreasing, LIFO cost of goods sold and FIFO inventory are preferred because they are the closest estimates of current costs.

A survey is taken to determine whether the average starting salaries of CFA charterholders is equal to or greater than $62,500 per year. What is the test statistic given a sample of 125 newly acquired CFA charterholders with a mean starting salary of $65,000 and a standard deviation of $2,600? A)0.96. B)10.75. C)-10.75.

B is correct With a large sample size (125) and an unknown population variance, either the t-statistic or the z-statistic could be used. Using the z-statistic, it is calculated by subtracting the hypothesized parameter from the parameter that has been estimated and dividing the difference by the standard error of the sample statistic. The test statistic = (sample mean - hypothesized mean) / (sample standard deviation / (sample size1/2)) = (X − µ) / (s / n1/2) = (65,000 - 62,500) / (2,600 / 1251/2) = (2,500) / (2,600 / 11.18) = 10.75.

Concerning an ordinary annuity and an annuity due with the same payments and positive interest rate, which of the following statements is most accurate? A)There is no relationship. B)The present value of the ordinary annuity is less than an annuity due. C)The present value of the ordinary annuity is greater than an annuity due.

B is correct With a positive interest rate, the present value of an ordinary annuity is less than the present value of an annuity due.

A hedge fund that charges an incentive fee on all profits, but only if the fund's rate of return exceeds a stated benchmark, is said to have a: A)high water mark. B)soft hurdle rate. C)hard hurdle rate.

B is correct With a soft hurdle rate, a hedge fund charges an incentive fee on all profits, but only if the fund's rate of return exceeds a stated benchmark. With a hard hurdle rate, a hedge fund charges an incentive fee only on the portion of returns that exceed a stated benchmark. With a high water mark, a fund's value must exceed its highest previous value before the fund may charge an incentive fee.

A yield curve for coupon bonds is composed of yields on bonds with similar: A.) maturities. B.) Issuers. C.) coupon rates.

B is correct Yield curves are typically constructed for bonds of the same or similar issuers, such as a government bond yield curve or AA rated corporate bond yield curve.

which of the following most likely trades in secondary markets? A.) Open-end funds B.) Closed-end Funds C.) Unit investment trusts

B is correct closed end funds trade on secondary markets and don't offer redemption features

The Dow jones industrial average is A.) Equal weighted B.) Price weighted C.) Value weighted

B is correct high priced stocks carry more weight then lower priced stocks

A perfectly competitive firm will not expand its output beyond the quantity where: A)the marginal cost is greater than marginal revenue. B)the market price is equal to its marginal cost. C)its marginal revenue is positive.

B is correct in the short run or long run the profit is maximized for a perfectly competitive market where price equals marginal cost

A pitching machine is calibrated to deliver a fastball at a speed of 98 miles per hour. Every day, a technician samples the speed of twenty-five fastballs in order to determine if the machine needs adjustment. Today, the sample showed a mean speed of 99 miles per hour with a standard deviation of 1.75 miles per hour. Assume the population is normally distributed. At a 95% confidence level, what is the t-value in relation to the critical value? A)The critical value exceeds the t-value by 1.3 standard deviations. B)The t-value exceeds the critical value by 0.8 standard deviations. C)The t-value exceeds the critical value by 1.5 standard deviations.

B is correct t = (99 - 98) / (1.75 / √25) = 2.86. The critical value for a two-tailed test at the 95% confidence level with 24 degrees of freedom is ±2.06 standard deviations. Therefore, the t-value exceeds the critical value by 0.8 standard deviations. T value uses the degrees of freedom df--0.20--0.10--0.05--0.02--0.01--0.001- 24 1.318--1.711--2.064--2.492--2.797--3.745 25 1.316--1.708--2.060--2.485--2.787--3.725

Under IFRS, if the lessor classifies a lease as an operating lease, the leased asset appears on the balance sheet of: A)the lessee. B)neither the lessor nor the lessee. C)the lessor.

Which of the following statements regarding confidence intervals is most accurate? A)The higher the significance level, the wider the confidence interval. B)The lower the significance level, the wider the confidence interval. C)The lower the degree of confidence, the wider the confidence interval.

B is correct A higher degree of confidence requires a wider confidence interval. The degree of confidence is equal to one minus the significance level, and so the wider the confidence interval, the higher the degree of confidence and the lower the significance level.

Which of the following most likely contributes to a current account deficit? A.) High taxes. B.) Low private savings. C.) Low private investment

B is correct. A current account deficit tends to result from low private saving, high private investment, a government deficit, or a combination of the three. Of the choices, only low private savings contributes toward a current account deficit.

A repurchase agreement is most comparable to a(n): A.) interbank deposit. B.) collateralized loan. C.) negotiable certificate of deposit.

B is correct. A repurchase agreement (repo) can be viewed as a collateralized loan where the security sold and subsequently repurchased represents the collateral posted

Which of the following most likely contributes to a current account deficit? A.) High taxes. B.) Low private savings. C.) Low private investment.

B is correct. A current account deficit tends to result from low private saving, high private investment, a government deficit, or a combination of the three.

The least likely cause of a decrease in aggregate demand is: A.) higher taxes. B.) a weak domestic currency. C.) a fall in capacity utilization.

B is correct. A weak domestic currency will result in an increase in aggregate demand at each price level—a rightward shift in the AD curve.

Consumption = 15.0 Capital consumption allowance = 1.5 Government spending = 3.8 Imports = 1.7 Gross private domestic investment = 4.0 Exports = 1.5 Based only on the data given, the gross domestic product and national income are respectively closest to: 21.1 and 20.6. 22.6 and 21.1. 22.8 and 20.8.

B is correct. GDP = Consumption + Gross private domestic investment + Government Spending + Exports - Imports = 15 + 4 + 3.8 + 1.5 - 1.7 = 22.6. National income = GDP - CCA = 22.6 - 1.5 = 21.1

Compared with exchange-traded derivatives, over-the-counter derivatives would most likely be described as: A.) standardized. B.) less transparent. C.) more transparent.

B is correct. Over-the counter-derivatives markets are customized and mostly unregulated. As a result, over-the-counter markets are less transparent in comparison with the high degree of transparency and standardization associated with exchange-traded derivative markets.

Price elasticity of demand for a good will most likely be greater if: A.) there are no substitutes for the good. B.) consumers consider the good as discretionary. C.) consumers spend a small portion of their budget on the good.

B is correct. Price elasticity of demand is likely to be greater for items that are seen as optional or discretionary.

A private equity fund desiring to realize an immediate and complete cash exit from a portfolio company is most likely to pursue a(n): A.) IPO. B.) trade sale. C.) recapitalization.

B is correct. Private equity funds can realize an immediate cash exit in a trade sale. Using this strategy, the portfolio company is typically sold to a strategic buyer.

. If a commodity's forward curve is in contango, the component of a commodities futures return most likely to reflect this is: A.) spot prices. B.) the roll yield. C.) the collateral yield.

B is correct. Roll yield refers to the difference between the spot price of a commodity and the price specified by its futures contract (or the difference between two futures contracts with different expiration dates). When futures prices are higher than the spot price, the commodity forward curve is upward sloping, and the prices are referred to as being in contango. Contango occurs when there is little or no convenience yield.

One disadvantage of the Herfindahl-Hirschmann Index is that the index: A.) is difficult to compute. B.) fails to reflect low barriers to entry. C.) fails to reflect the effect of mergers in the industry. Solution

B is correct. The Herfindahl-Hirschmann Index does not reflect low barriers to entry that may restrict the market power of companies currently in the market.

An increase in the price level would shift the: A.) IS curve. B.) LM curve. C.) aggregate demand curve.

B is correct. The LM curve represents combinations of income and the interest rate at which the demand for real money balances equals the supply.

An increase in the price level would shift the: A.) IS curve. B.) LM curve. C.) aggregate demand curve.

B is correct. The LM curve represents combinations of income and the interest rate at which the demand for real money balances equals the supply. For a given nominal money supply, an increase in the price level implies a decrease in the real money supply

Patent fees and legal services are recorded in which of the following balance of payments components? A.) Capital account. B.) Current account. C.) Financial account.

B is correct. The current account measures the flows of goods and services (including income from foreign investments). Patent fees and legal services are both captured in the services sub-account of the current account. Current account also involves income from foreign investments

Over time, the market share of the dominant company in an oligopolistic market will most likely: A.) increase. B.) decrease. C.) remain the same.

B is correct. The dominant company's market share tends to decrease as profits attract entry by other companies.

The rate, interpreted to be the incremental return for extending the time-to-maturity of an investment for an additional time period, is the: A.) add-on rate. B.) forward rate. C.) yield-to-maturity.

B is correct. The forward rate can be interpreted to be the incremental or marginal return for extending the time-to-maturity of an investment for an additional time period. The add-on rate (bond equivalent yield) is a rate quoted for money market instruments such as bank certificates of deposit and indexes such as Libor and Euribor.

Which of the following statements with respect to Giffen and Veblen goods is least accurate? A.) Giffen goods are "inferior," whereas Veblen goods are "high-status" goods. B.) The highly negative income effect overpowers the substitution effect for both types of goods. C.) Both types of goods demonstrate the possibility of a positively sloping demand curve.

B is correct. The overwhelming nature of the highly negative income effect over the substitution effect is applicable to Giffen goods only. Veblen goods are highly valued, high-priced "status" goods; consumers may tend to buy more of a Veblen good if its price rises.

Which role is a central bank least likely to assume? A.) Lender of last resort. B.) Sole supervisor of banks. C.) Supplier of the currency.

B is correct. The supervision of banks is not a role that all central banks assume. When it is a central bank's role, responsibility may be shared with one or more entities.

An analyst gathered the following market share data for an industry comprised of five companies ----------------------------------------------- :Company ------- Market Share (%) Zeta --------------> 35 Yusef -------------> 25 Xenon ------------> 20 Waters ------------> 10 Vlastos -----------> 10 --------------------------------------------- Q. The industry's three-firm Herfindahl-Hirschmann Index is closest to: A.) 0.185. B.) 0.225. C.) 0.235.

B is correct. The three-firm Herfindahl-Hirschmann Index is 0.352 + 0.252 + 0.202 = 0.225.

Company -- Market Share % A --> 35 B --> 25 C --> 20 D -->10 F --> 10 Q. The industry's three-firm Herfindahl-Hirschmann Index is closest to: A.) 0.185. B.) 0.225. C.) 0.235.

B is correct. The three-firm Herfindahl-Hirschmann Index is 0.35^2 + 0.25^2 + 0.20^2 = 0.225.

The value of a European put option can be either directly or inversely related to the: A.) exercise price. B.) time to expiration. C.) volatility of the underlying.

B is correct. The value of a European put option can be either directly or indirectly related to time to expiration. The direct effect is more common, but the inverse effect can prevail the longer the time to expiration, the higher the risk-free rate, and the deeper in-the-money is the put.

Which of the following is most likely a private equity strategy? A.) Merger arbitrage B.) Venture capital C.) Quantitative directional

B is correct. Venture capital is a private equity strategy in which private equity companies invest and get actively involved in the management of portfolio companies. A is incorrect because this is a hedge fund strategy. C is incorrect because this is a hedge fund strategy.

what is the same calculation as IRR? A.) Time Weighted Return B.) Money Weighted Return

B.. Money weighted return is the same calculation as IRR Time weighted return is the same calculation as Geometric return

A overpriced stock will plot (Below/Above) the Security Market Line(SML)?

Below

A publicly traded company has a beta of 1.2, a debt/equity ratio of 1.5, ROE of 8.1%, and a marginal tax rate of 40%. The unlevered beta for this company is closest to: A)0.832. B)1.071. C)0.632.

Beta (unlevered) = 1.2(Levered beta) * (1/1+(1-.40*1.5) = 0.632 C is correct

**disregard until known if it is a deficit or surplus** In a country that has a current account surplus, it is most likely that: A)domestic investment is greater than domestic government savings. B)private domestic savings are greater than the budget deficit. C)total domestic savings are greater than domestic investment.

A distribution that is *less* peaked or flatter than normal is: A)skewed. B)leptokurtic. C)platykurtic.

A float adjustment market capitalization weighted index weights each of its constituent securities by its price A.) its trading volume B.) the number of its shares outstanding C.) the number of its shares available to the investing public

As an economic expansion approaches its peak, the economy is most likely to show: A)a decrease in inventory levels. B)accelerating sales growth. C)an increase in the inventory-to-sales ratio.

In accounting for PP&E using the cost model, companies are required to disclose both gross asset value and accumulated depreciation under: A)IFRS but not U.S. GAAP. B)U.S. GAAP but not IFRS. C)both IFRS and U.S. GAAP.

In equilibrium, an inefficient portfolio will plot: A)below the CML and below the SML. B)on the CML and below the SML. C)below the CML and on the SML.

Monetary policy is least likely to include: A.) setting an inflation rate target. B.) changing an official interest rate. C.) enacting a transfer payment program.

The clearinghouse, in U.S. futures markets is least likely to: A)act as a counterparty in futures contracts. B)guarantee performance of futures contract obligations. C)choose which assets will have futures contracts.

The multiplication rule of probability is used to calculate the: A)probability of at least one of two events. B)unconditional probability of an event, given conditional probabilities. C)joint probability of two events.

The yield from an investment in commodities that results from a difference between the spot price and a futures price is the: A)convenience yield. B)collateral yield. C)roll yield.

Which of the following statements best justifies analyst scrutiny of valuation allowances? A)If differences in taxable and pretax incomes are never expected to reverse, a company's equity may be understated. B)Increases in valuation allowances may be a signal that management expects earnings to improve in the future. C)Changes in valuation allowances can be used to manage reported net income.

An increase in the riskless rate of interest, other things equal, will: A)decrease call option values and increase put option values. B)decrease call option values and decrease put option values. C)increase call option values and decrease put option values.

C An increase in the risk-free rate of interest will increase call option values and decrease put option values.

Which of the following statements about arbitrage is NOT correct A)No investment is required when engaging in arbitrage. B)If an arbitrage opportunity exists, making a profit without risk is possible. C)Arbitrage can cause markets to be less efficient.

C Arbitrage is defined as the existence of riskless profit without investment and involves selling an asset and simultaneously buying the same asset for a lower price. Since the trades cancel each other, no investment is required. Because it is done simultaneously, a profit is guaranteed, making the transaction risk free. Arbitrage actually helps make markets more efficient because price discrepancies are immediately eradicated by the actions of arbitrageurs.

A unique item such as fine art is most likely to be exchanged in a(n): A)order-driven market. B)quote-driven market. C)brokered market.

C Brokered markets are typically the best market structure for unique items.

Anderson, Baker and Chang all received their CFA charters and ordered new business cards. Their business cards are as follows: G. J. Anderson, CFA B. K. Baker, Chartered Financial Analyst M. S. Chang, C.F.A Which of the business cards use the CFA marks improperly? A)Baker and Chang. B)Anderson and Chang. C)Chang.

C Consistent with Standard VII(B), members must use the CFA marks in a proper manner. Members may indicate "CFA" or "Chartered Financial Analyst" after their names, but the designation should not be given more prominence than that used in printing the name itself. Also, periods should not be used to separate the letters.

If a firm's growth rate is 12% and its dividend payout ratio is 30%, its current return on equity (ROE) is closest to: A)40.00%. B)36.00%. C)17.14%.

C Explanation g = (RR)(ROE) g / RR = ROE 0.12 / (1 - 0.30) = 0.12 / 0.70 = 0.1714 or 17.14%

Which of the following statements about leverage is most accurate? A)A decrease in interest expense will increase the company's degree of total leverage. B)An increase in fixed costs (holding sales and variable costs constant) will reduce the company's degree of operating leverage. C)If the company has no debt outstanding, then its degree of total leverage equals its degree of operating leverage.

C If DFL = 1 then DTL = (DOL)(1) which complies to DTL = DOL A decrease in interest expense will decrease DFL, which will decrease DTL. An increase in fixed costs will increase the company's DOL.

Thomas Merton, a car industry analyst, wants to investigate a relationship between the types of ads used in advertising campaigns and sales to customers in certain age groups. In order to make sure he includes manufacturers of all sizes, Merton divides the industry into four size groups and draws random samples from each group. What sampling method is Merton using? A)Cross-sectional sampling. B)Simple random sampling. C)Stratified random sampling.

C In stratified random sampling, we first ******divide the population into subgroups****** based on some relevant characteristic(s) and then make random draws from each group. during simple random sampling every element in the population has EQUAL probabilities of being choosen

Who benefits the most from a quota? A)Foreign consumers. B)Foreign producers. C)Domestic producers.

C Quotas restrict the supply of imported goods, which increases the price domestically benefiting domestic producers.

The effect of a company announcement that they have begun a project with a current cost of $10 million that will generate future cash flows with a present value of $20 million is most likely to: A)increase value of the firm's common shares by $10 million. B)increase the value of the firm's common shares by $20 million. C)only affect value of the firm's common shares if the project was unexpected.

C Stock prices reflect investor expectations for future investment and growth. A new positive-NPV project will increase stock price only if it was not previously anticipated by investors.

A support level is the price range at which a technical analyst would expect the: A)demand for a stock to decrease substantially. B)supply of a stock to decrease substantially. C)demand for a stock to increase substantially.

C Support and resistance levels. Most stock prices remain relatively stable and fluctuate up and down from their true value. The lower limit to these fluctuations is called a support level - the price range where a stock appears cheap and attracts buyers. The upper limit is called a resistance level - the price range where a stock appears expensive and initiates selling. Generally, a support level will develop after a stock has experienced a steady decline from a higher price level. Technicians believe that, at some price below the recent peak, other investors will buy who did not buy prior to the first price increase and have been waiting for a small reversal to get into the stock. When the price reaches this support price, demand surges and price and volume begin to increase again.

Which of the following is an assumption of the Capital Asset Pricing Model (CAPM)? A)Investors with shorter time horizons exhibit greater risk aversion. B)There are no margin transactions or short sales. C)No investor is large enough to influence market prices.

C The CAPM assumes all investors are price takers and no single investor can influence prices. The CAPM also assumes markets are free of impediments to trading and that all investors are risk averse and have the same one-period time horizon.

The demand curves faced by monopolistic competitors is: A)inelastic due to the availability of many complementary goods. B)not sensitive to price due to absence of close substitutes. C)elastic due to the availability of many close substitutes.

C The demand for products from monopolistic competitors is elastic due to the availability of many close substitutes. If a firm increases its product price, it will lose customers to firms selling substitute products.

Which of the following statements about the discounted payback period is *least accurate*? The discounted payback: A.) method can give conflicting results with the NPV. B.) frequently ignores terminal values. C.) period is generally shorter than the regular payback.

C The discounted payback period calculates the present value of the future cash flows. Because these present values will be less than the actual cash flows it will take a longer time period to recover the original investment amount.

Which of the following is used to illustrate a firm's weighted average cost of capital (WACC) at different levels of capital? A)Cost of capital component schedule. B)Schedule of marginal capital break points. C)Marginal cost of capital schedule.

C The marginal cost of capital schedule shows the WACC at different levels of capital investment. It is usually upward sloping and is a function of a firm's capital structure and its cost of capital at different levels of total capital investment.

Lora Murphy has an account at Ferrell Investments, a GIPS-compliant firm. Murphy invests in small-cap value stocks and pays Ferrell a standard fee to execute her buy and sell orders. According to GIPS, is Ferrell required to include Murphy's portfolio in their small-cap value stock composite? A)Yes, because the portfolio is fee-paying. B)No, because constructing composites is voluntary. C)No, because the portfolio is non-discretionary.

C To comply with GIPS, a firm must include all fee-paying discretionary portfolios in at least one composite. Discretionary portfolios are those for which the firm makes investment decisions. Because this portfolio's owner is making her own investment decisions, the portfolio is non-discretionary and should not be included in the firm's composites.

The 6% semiannual coupon, 7-year notes of Woodbine Transportation, Inc. trade for a price of 94.54. What is the company's after-tax cost of debt capital if its marginal tax rate is 30%? A)4.2%. B)2.1%. C)4.9%.

C To determine Woodbine's before-tax cost of debt, find the yield to maturity on its outstanding notes: PV = -94.54; FV = 100; PMT = 6 / 2 = 3; N = 14; CPT → I/Y = 3.50 × 2 = 7% Woodbine's after-tax cost of debt is kd(1 - t) = 7%(1 - 0.3) = 4.9%

Bollinger bands are drawn based on the: A)high and low prices in a recent period. B)difference between two smoothed moving averages. C)standard deviation of recent price changes.

C To use Bollinger bands, an analyst will calculate the standard deviation of prices over some number of trading days, and typically will draw the bands two standard deviations above and below a moving average for the same number of days.

If a company chooses to write down inventory, which ratio is most likely to improve? A)Operating profit margin. B)Debt-to-equity ratio. C)Total asset turnover.

C Total asset turnover should improve, as the numerator (sales) would not be affected while the denominator (total assets) would be lower. Profitability ratios and the debt-to-equity ratio would be worse due to lower profits and lower equity due to the inventory writedown.

Joe Bay, CFA, wants to test the hypothesis that the variance of returns on energy stocks is equal to the variance of returns on transportation stocks. Bay assumes the samples are independent and the returns are normally distributed. The appropriate test statistic for this hypothesis is: A)a Chi-square statistic. B)a t-statistic. C)an F-statistic.

C Bay is testing a hypothesis about the equality of variances of two normally distributed populations. The test statistic used to test this hypothesis is an F-statistic. A chi-square statistic is used to test a hypothesis about the variance of a single population.

An analyst wants to estimate the yield to maturity on a non-traded 4-year, annual pay bond rated A. Among actively traded bonds with the same rating, 3-year bonds are yielding 3.2% and 6-year bonds are yielding 5.0%. Using matrix pricing the analyst should estimate a YTM for the non-traded bond that is closest to: A)3.6%. B)4.1%. C)3.8%.

C Interpolating: 3.2% + [(4 - 3) / (6 - 3)] × (5.0% - 3.2%) = 3.8%

A forward premium indicates: A.) an expected increase in demand for the base currency. B.) the interest rate is higher in the base currency than in the price currency. C.) the interest rate is higher in the price currency than in the base currency.

C IS CORRECT price currency > Base currency signals a forward premium

Given the following data and assuming a periodic inventory system, what is the ending inventory using the average cost method? Purchases --> 40 units @ $60 50 units @ $55 60 units @ $45 Sales --> 25 units @ $65 30 units @ $60 40 units @ $50 A)$2,933. B)$3,141. C)$2,878.

C ia correct Average cost per unit purchased: 40 units at $60/per unit = $2,400 50 units at $55/per unit = $2,750 60 units at $45/per unit = $2,700 Total = 150 units = $7,850 Average cost per unit = $7,850 /150 units = $52.33/unit Purchased 40 + 50 + 60 = 150 units. Sold 25 + 30 + 40 = 95 Ending inventory = 150 - 95 = 55 units × $52.33/unit = $2,878

using the dividend discount model , what is the cost of equity capital for Zeller mining if the company will pay a dividend og $2.30 next year, has a payout ratio of 30%, and a ROE of 15%, and a stock price of $45 A.) 9.61% B.) 10.5% C.) 15.61%

C is corrct K(e) = {D^1/P(o)} + G

**know for the exam** Companies are required to report segment data under: A)U.S. GAAP but not IFRS. B)IFRS but not U.S. GAAP. C)both IFRS and U.S. GAAP.

C is correct

**know for the exam** Component depreciation is required under: A)both IFRS and U.S. GAAP. B)U.S. GAAP, but not IFRS. C)IFRS, but not U.S. GAAP.

C is correct

*know for the exam* Under which approach to valuing real estate properties is an analyst most likely to estimate a capitalization rate? A)Cost approach. B)Comparable sales approach. C)Income approach.

C is correct

A derivative is best described as a financial instrument that derives its performance by: A.) passing through the returns of the underlying. B.) replicating the performance of the underlying. C.) transforming the performance of the underlying.

C is correct

A disadvantage of G-spreads and I-spreads is that they are theoretically correct only if the spot yield curve is: A)upward sloping. B)downward sloping. C)flat.

C is correct

A firm in a perfectly competitive industry that seeks to maximize profit is most likely to continue production in the short run as long which of the following conditions exists? Price is equal to or greater than: A)average fixed cost. B)marginal cost. C)average variable costs.

C is correct

A higher Sharpe ratio indicates: A)lower volatility of returns. B)a lower risk per unit of return. C)a higher excess return per unit of risk.

C is correct

A put option is in the money when: --------------------------------------- A)there is no put option with a lower exercise price in the expiration series. B)the stock price is higher than the exercise price of the option. C)the stock price is lower than the exercise price of the option.

C is correct

A structured security is a combination of: A)commercial paper and a backup line of credit. B)a corporate bond and a syndicated loan. C)a medium-term note and a derivative.

C is correct

According to Keynesian school theory, business cycles are caused by: A)changes in technology over time. B)inappropriate variations in the growth of the money supply. C)excessive optimism or pessimism among business managers.

C is correct

Agency bonds are issued by: A.) local governments. B.) national governments. C.) quasi-government entities.

C is correct

An enterprise value multiple is typically calculated as the ratio of enterprise value to: A)sales. B)net income. C)EBITDA.

C is correct

Average weekly initial claims for unemployment insurance are classified as a: A)lagging indicator. B)coincident indicator. C)leading indicator.

C is correct

Buying insurance is best described as a method for an organization to: A)prevent a risk. B)shift a risk. C)transfer a risk.

C is correct

Changes in asset lives and salvage values are changes in accounting: A)estimates and are applied retrospectively. B)principle and are applied retrospectively. C)estimates and are applied prospectively.

C is correct

Clearing instructions are _________________ A.) How to trade B.) When to trade C.) How to settle a trade

C is correct

Compared to GDP calculated using the sum-of-value-added method, GDP using the value-of-final-output method will be: A)biased upward. B)biased downward. C)equal to it.

C is correct

Compared to a value-weighted index, the type of index most likely to have a value tilt is a(n): A)price-weighted index. B)equal-weighted index. C)fundamental-weighted index.

C is correct

Dividends or interest paid by the asset underlying a call option: A)increase the value of the option. B)have no effect on the value of the option. C)decrease the value of the option.

C is correct

For financial assets classified as available for sale, how are unrealized gains and losses reflected in shareholders' equity? A.) they are not recognized B.) they flow through to retained earnings C.) hey are a component of accumulated other comprehensive income

C is correct

For relative valuation, a peer group is best described as companies: A)at a similar stage of the industry life cycle. B)in a similar sector or industry classification. C)with similar business activities and competitive factors.

C is correct

Noncurrent assets on the balance sheet are most closely linked to which part of the cash flow statement? A)Financing cash flows. B)Operating cash flows. C)Investing cash flows.

C is correct

One of the primary benefits of securitization is that it: A)improves the collectability of the loans that are securitized. B)removes problem assets from the issuing firm's balance sheet. C)improves the legal claims of the security holders to the loans that are securitized.

C is correct

Project sequencing is best described as: A)prioritizing funds to achieve the maximum value for shareholders, given capital limitations. B)arranging projects in an order such that cash flows from the first project fund subsequent projects. C)an investment in a project today that creates the opportunity to invest in other projects in the future.

C is correct

Settlement for corporate bond trades generally happen on what basis? A)Cash settlement. B)Trade date + 1 day. C)Trade date + 3 days.

C is correct

Some forward contracts are termed cash settlement contracts. This means: A)at contract expiration, the long can buy the asset from the short or pay the difference between the market price of the asset and the contract price. B)at settlement, the long purchases the asset from the short for cash. C)either the long or the short in the forward contract will make a cash payment at contract expiration and the asset is not delivered.

C is correct

Standards of conduct are most accurately described as: A)a necessary part of any ethical code. B)providing the public with the values and general expectations for a group of professionals. C)giving members of a group a minimum level of acceptable behavior.

C is correct

Technical analysts who use cycles define a Kondratieff wave as a cycle of: A)10 years. B)18 years. C)54 years.

C is correct

The Sustainable Growth Rate is equal to: A)(ROE) × (1-RR). B)(ROE) × (1+RR). C)(ROE) × (RR).

C is correct

The central limit theorem concerns the sampling distribution of the: A)sample standard deviation. B)population mean. C)sample mean.

C is correct

The first step in managing an organization's risks should be to determine: A)a risk budget for the organization. B)the organization's risk exposures. C)the organization's risk tolerance.

C is correct

The payoff of a call option on a stock at expiration is equal to: A)the maximum of zero and the exercise price minus the stock price. B)the minimum of zero and the stock price minus the exercise price. C)the maximum of zero and the stock price minus the exercise price.

C is correct

The price of a fixed-for-floating interest rate swap contract: A)is directly related to changes in the floating rate. B)may vary over the life of the contract. C)is established at contract initiation.

C is correct

The stakeholder theory of corporate governance is primarily focused on: A)increasing the value a company. B)the interests of various stakeholders rather than the interests of shareholders. C)resolving the competing interests of those who manage companies and other groups affected by a company's actions.

C is correct

The time it takes for policy makers to enact a fiscal policy action is best described as: A)implementation lag. B)legislative lag. C)action lag.

C is correct

The trend line for a stock in an uptrend is constructed by drawing a straight line through the: A)periodic averages. B)highs. C)lows.

C is correct

Time-weighted returns are used by the investment management industry because they: A)result in higher returns versus the money-weighted return calculation. B)take all cash inflows and outflows into account using the internal rate of return. C)are not affected by the timing of cash flows.

C is correct

To adjust for operating leases before calculating financial statement ratios, what value should an analyst add to a firm's liabilities? A)Difference between present values of lease payments and the asset's future earnings. B)Sum of future operating lease obligations. C)Present value of future operating lease payments.

C is correct

Under U.S. GAAP, the actual coupon payment on a bond is reported on the statement of cash flow as: A)a financing cash outflow. B)an investing cash outflow. C)an operating cash outflow.

C is correct

Under which approach to valuing real estate properties is an analyst most likely to estimate a capitalization rate? A)Comparable sales approach. B)Cost approach. C)Income approach.

C is correct

Wes Smith, CFA, has been working toward the completion of a Master of Science in Finance. He has passed all the necessary courses and written the necessary thesis. He still must defend the thesis in one month. Smith's thesis advisor assures him that he will pass the thesis defense. Smith has new business cards printed with "M.S. in Finance" after his name. This is a violation of: A)Standard VII(B), Reference to CFA Institute, the CFA Designation, and the CFA Program. B)Standard I(C), Misrepresentation. C)none of the Standards if Smith does not make the cards public until after he defends his thesis and receives his degree.

C is correct

What is the appropriate test statistic for a hypothesis test concerning the *variance of a two* normally distributed populations A.) T- Statistic B.) Chi square Statistic C.) F - Statistic

C is correct

When technical analysts say a stock has good "relative strength," they mean the: A)recent trading volume in the stock has exceeded the normal trading volume. B)stock has performed well compared to other stocks in the same risk category as measured by beta. C)ratio of the price of the stock to a market index has trended upward.

C is correct

Which of the following best describes why adding a commodities index position to a portfolio of stocks and bonds may be beneficial? Commodities index positions: A)benefit from commodity markets oscillating between contango and backwardation. B)are positively correlated with stock and bond prices. C)serve as a hedge against inflation.

C is correct

Which of the following is used to illustrate a firm's weighted average cost of capital (WACC) at different levels of capital? A)Schedule of marginal capital break points. B)Marginal cost of capital schedule. C)Cost of capital component schedule.

C is correct

Which of the following risks is most accurately classified as a non-financial risk? A)Credit risk. B)Liquidity risk. C)Model risk.

C is correct

Which of the following statements about proxy statements is least accurate? Proxy statements are: A)available on the EDGAR web site. B)a good source of information about the qualifications of board members and management. C)not filed with the SEC.

C is correct

Which of the following statements best explains how automatic stabilizers work? Even without a change in fiscal policy, automatic stabilizers tend to promote: A)a budget deficit during a recession but do not promote a budget surplus during an inflationary expansion. B)a budget surplus during a recession and a budget deficit during an inflationary expansion. C)a budget deficit during a recession and a budget surplus during an inflationary expansion.

C is correct

Which of the following will result from futures prices for a particular commodity being in contango? A)Positive current yield. B)Negative collateral yield. C)Negative roll yield.

C is correct

Which of the following would be assessed first in a top-down valuation approach? A)Industry risks. B)Industry return on equity (ROE). C)Fiscal policy.

C is correct

Which statement best describes the properties of Student's t-distribution? The t-distribution is: A)symmetrical, and defined by two parameters. B)skewed, and defined by a single parameter. C)symmetrical, and defined by a single parameter.

C is correct

what type of index weighting that is most likely to be similar to a momentum strategy? A.) Equal weight B.) Fundamental weight C.) Market Cap weight

C is correct

which board is most likely to monitors a company's compliance with applicable ***laws and regulations** A.) Risk Committee B.) Audit committee C.) Governance committee

C is correct

An order to sell a security at the **best price available** is most likely a: A)limit order. B)stop order. C)market order.

C is correct A market order is an order to buy or sell a security immediately at the best available price. A limit order is an order to buy at the specified limit price or lower, or to sell at the limit price or higher. A stop order is an order to buy if the market price increases to the specified stop price, or to sell if the market price decreases to the stop price.

An asset-backed security with a senior/subordinated structure is said to have: A)prepayment tranching. B)time tranching. C)credit tranching.

C is correct A senior/subordinated structure in an ABS establishes credit tranching, in which risk of losses due to defaults on the underlying loans is redistributed among different classes of ABS holders. Time tranching redistributes prepayment risk among different classes of ABS holders.

One of the principal characteristics of swaps is that swaps: A)are highly regulated over-the-counter agreements. B)are standardized derivative instruments. C)may be likened to a series of forward contract

C is correct A swap agreement often requires that both parties agree to a series of transactions. Each transaction is similar to a forward contract, where a party is paying a fixed price to offset the risk associated with an unknown future value. Swaps are over-the-counter agreements but are not highly regulated. One of the benefits of swaps is that they can be customized to fit the needs of the counterparties. Thus, they are not standardized.

A waterfall structure is *least likely* describe: A) credit card ABS. B) auto loan ABS. C) agency RMBS.

C is correct A waterfall structure, where principal losses are allocated first to the lowest priority securities issued, would most likely describe auto loan ABS or credit card ABS, which often have a senior-subordinated structure. Agency RMBS are pass-through securities and do not have a senior-subordinated structure.

With respect to auto-loan backed ABS: A)some of them have some sort of credit enhancement. B)the underlying loans are collateralized so no credit enhancement is necessary. C)all of them have some sort of credit enhancement.

C is correct All automobile loan ABS have some sort of credit enhancement to make them attractive to institutional investors.

A forward rate agreement (FRA): A)is risk-free when based on the Treasury bill rate. B)is settled by making a loan at the contract rate. C)can be used to hedge the interest rate exposure of a floating-rate loan.

C is correct An FRA settles in cash and carries both default risk and interest rate risk, even when based on an essentially risk-free rate. It can be used to hedge the risk/uncertainty about a future payment on a floating rate loan.

Of the following types of firm, which is most suitable for P/B ratio analysis? A)A service industry firm without significant fixed assets. B)A firm with accounting standards different from other firms. C)A firm with accounting standards consistent to other firms.

C is correct Assuming consistent accounting standards across firms, P/B ratios can reveal signs of misvaluation across firms.

Which of the following firms is most likely to present a liquidity-based balance sheet rather than a classified balance sheet? A)Manufacturing firm. B)Chain of retail stores. C)Banking institution.

C is correct Banks often present liquidity-based balance sheets, which list all assets and liabilities in order of liquidity, because for banks this format is typically more relevant and reliable than a classified balance sheet. Firms in most other industries typically present classified balance sheets.

Central banks are most likely to pursue a target inflation rate: A)above 3%. B)equal to 0%. C)between 0 and 3%.

C is correct Central banks typically define price stability as a stable inflation rate of about 2% to 3%. A target of zero is not typically used because it would risk deflation.

Commercial industry classification systems such as the Global Industry Classification Standard (GICS) typically classify firms according to their: A)sensitivity to business cycles. B)correlations of historical returns. C)principal business activities.

C is correct Commercial providers of industry classification systems such as the GICS classify firms according to principal business activity, such as Consumer Staples, Financial Services, or Health Care.

Is an acquisition of treasury stock or a loss from the write-down of inventory under the lower-of-cost-or-market rule included in comprehensive income? Inventory write-down ----- Acquisition of treasury stock A)------No------------------------------No B)------No -----------------------------Yes C)-----Yes ------------------------------No

C is correct Comprehensive income includes all transactions that affect shareholders' equity except transactions with shareholders. Thus, any transaction that affects net income would also affect comprehensive income. Since the inventory write-down is included in net income, it is part of comprehensive income. The acquisition of treasury stock is a transaction with shareholders; thus, it is not a part of comprehensive income.

Other things equal, the no‐arbitrage forward price of an asset will be higher if the asset has: A.) convenience yield. B.) dividend payments. C.) storage costs.

C is correct Costs of holding an asset increase its no-arbitrage forward price. Benefits from holding the asset, such as dividends or convenience yield, decrease its no-arbitrage forward price.

A government that is implementing a contractionary fiscal policy is most likely to: A)increase spending on public works. B)decrease income tax rates. C)decrease transfer payments to households.

C is correct Decreasing spending or increasing taxes are contractionary fiscal policy actions. Increasing spending or decreasing taxes are expansionary.

Which of the following conditions is difficult for monetary policy to address because a central bank cannot reduce its nominal policy rate much below zero? A)Inflation. B)Stagflation. C)Deflation.

C is correct Deflation is difficult for central banks to address when policy rates cannot be lowered any further. Inflation can be addressed by contractionary monetary policy. Stagflation is difficult to address because monetary policy cannot pursue higher growth and lower inflation at the same time.

Which of the following is the most appropriate strategy for a fixed income portfolio manager under the anticipation of an economic expansion? A)Sell corporate bonds and purchase Treasury bonds. B)Sell lower-rated corporate bonds and buy higher-rated corporate bonds. C)Purchase corporate bonds and sell Treasury bonds.

C is correct During periods of economic expansion corporate yield spreads generally narrow, reflecting decreased credit risk. If yield spreads narrow, the prices of corporate bonds increase relative to the prices of Treasuries. Selling lower-rated bonds and buying higher-rated bonds is an appropriate strategy if an economic contraction is anticipated.

Sensitivity of a bond's price to a change in yield at a specific maturity is least appropriately estimated by using: A)key rate duration. B)partial duration. C)effective duration.

C is correct Effective duration is used to measure the sensitivity of a bond price to a *parallel shift* in the yield curve. Key rate duration, also known as partial duration, is used to measure the sensitivity of a bond price to a change in yield at a specific maturity.

Which of the following is *least likely* an example of external credit enhancement? A)Bank guarantee. B)Surety bond. C)Excess spread.

C is correct Excess spread is an *internal credit enhancement*. External credit enhancements include bank guarantees, letters of credit, and surety bonds.

If a firm's financial reports are of low quality, can users of the reports assess the quality of the firm's earnings? A)Yes, because if financial reports are of low quality, earnings are also of low quality. B)Yes, because users can assess earnings quality independently of financial reporting quality. C)No, because low-quality financial reports are not useful for assessing the quality of earnings.

C is correct Financial reports that are of low quality make it difficult or impossible for users of the statements to assess the quality of the firm's earnings, cash flows, and balance sheet values.

Food, beverage, and utility companies are examples of: A)declining industries. B)cyclical industries. C)defensive industries.

C is correct Food, beverage, and utility companies provide basic necessities of life and are considered to be defensive industries. In a recession, the demand for their products will not fall as much as for some of the other industry groups.

Which of the following is *least likely* a characteristic of futures contracts? Futures contracts: A)are traded in an active secondary market. B)are backed by the clearinghouse. C)require weekly settlement of gains and losses.

C is correct Futures contracts require daily settlement of gains and losses. The other statements are accurate.

Greater volatility in the price of the underlying asset will have what effect on the value of a call option and the value of a put option? --------------------------------------------------------- Value of a call option ----- Value of a put option A)-----Increase --------------Decrease B)-----Decrease--------------Increase C)----Increase ---------------Increase

C is correct Greater volatility in the price of the underlying asset increases the values of both puts and calls because options are "one-sided." Since an option's value can fall no lower than zero (it expires out of the money), increased volatility increases an option's upside potential but does not increase its downside exposure.

A futures investor receives a margin call. If the investor wishes to maintain her futures position, she must make a deposit that restores her account to the: A)daily margin. B)maintenance margin. C)initial margin.

C is correct In futures trading, a margin call requires the investor to restore the account to the initial margin level or close the position.

In Fama and French's multifactor model, the expected return on a stock is explained by: A)excess return on the market portfolio, book-to-market ratio, and price momentum. B)firm size, book-to-market ratio, and price momentum. C)firm size, book-to-market ratio, and excess return on the market portfolio.

C is correct In the Fama and French model, the three factors that explain individual stock returns are firm size, the firm's book value-to-market value ratio, and the excess return on the market portfolio. The Carhart model added price momentum as a fourth factor.

Holding other factors constant, the interest rate risk of a coupon bond is higher when the bond's: A)coupon rate is higher. B)current yield is higher. C)yield to maturity is lower.

C is correct In this case the only determinant that will cause higher interest rate risk is having a low yield to maturity. A higher coupon rate and a higher current yield will result in lower interest rate risk.

Treasury Inflation Protected Securities, which provide investors with protection against inflation by adjusting the par value and keeping the coupon rate fixed, are best described as: A)indexed-annuity bonds. B)interest-indexed bonds. C)capital-indexed bonds.

C is correct Indexed bonds that adjust the principal value while keeping the coupon rate fixed are best described as capital-indexed bonds. Interest-indexed bonds adjust the coupon rate. Indexed-annuity bonds are fully amortizing with the payments adjusted.

Asset allocation using technical analysis is most likely to be based on: A)a stochastic oscillator. B)correlations within asset classes. C)intermarket analysis.

C is correct Intermarket analysis based on relative strength analysis is used to identify inflection points in the price trends of asset classes in order to adjust asset class allocations.

An inverse head and shoulders pattern most likely indicates: A)the continuation of a downtrend. B)the reversal of an uptrend. C)the reversal of a downtrend.

C is correct Inverse head and shoulders patterns typically occur after downtrends and indicate that the trend is going to reverse.

Equal weighting is the most common weighting methodology for indexes of which of the following types of assets? A)Fixed income securities. B)Equities. C)Hedge funds.

C is correct Most hedge fund indexes are equal-weighted. Equity and fixed income indexes are predominately market capitalization weighted.

Which of the following best describes a negative bond covenant? The requirement to: A.) insure and maintain assets. B.) comply with all laws and regulations. C.) maintain a minimum interest coverage ratio.

C is correct Negative covenants enumerate what issuers are prohibited from doing. Restrictions on debt, including maintaining a minimum interest coverage ratio or a maximum debt usage ratio, are typical examples of negative covenants.bnd

Which of the following is least likely an indicator of a firm's liquidity? A.) Cash as a percentage of sales. B.) Inventory turnover. C.) Amount of credit sales.

C is correct No inferences about liquidity are warranted based on this measure. A firm may have higher credit sales than another simply because it has more sales overall. Cash as a proportion of sales and inventory turnover are indicators of liquidity.

Nelson, Inc. has fixed financing costs of $3 million, fixed operating costs of $5 million, and variable costs of $2.00 per unit. If the price of Nelson's product is $4.00, Nelson's operating breakeven quantity of sales is: A)1.0 million units. B)4.0 million units. C)2.5 million units.

C is correct Operating breakeven quantity = fixed operating costs / (price - variable cost per unit) = $5 million / ($4.00 - $2.00) = 2,500,000 units.

An argument against using the price-to-sales (P/S) valuation approach is that: A)P/S ratios are not as volatile as price-to-earnings (P/E) multiples. B)sales figures are not as easy to manipulate or distort as earnings per share (EPS) and book value. C)P/S ratios do not express differences in cost structures across companies.

C is correct P/S ratios do not express differences in cost structures across companies. Both remaining responses are advantages of the P/S ratios, not disadvantages.

A portfolio to the right of the market portfolio on the capital market line (CML) is created by: A) fully diversifying. B) holding both the risk-free asset and the market portfolio. C) holding more than 100% of the risky asset.

C is correct Portfolios that lie to the right of the market portfolio on the capital market line are created by borrowing funds to own more than 100% of the market portfolio (M). The statement, "holding both the risk-free asset and the market portfolio" refers to portfolios that lie to the left of the market portfolio. Portfolios that lie to the left of point M are created by lending funds (or buying the risk free-asset). These investors own less than 100% of both the market portfolio and more than 100% of the risk-free asset. The portfolio at point Rf (intersection of the CML and the y-axis) is created by holding 100% of the risk-free asset

The time it takes for policy makers to determine that the economy requires a fiscal policy action is best described as: A)impact lag. B)action lag. C)recognition lag.

C is correct Recognition lag refers to the time it takes for fiscal policy makers to determine the need for a policy action.

The interest rate on excess reserves borrowed by one bank from another bank is most accurately described as a(n): A)interbank lending rate. B)reserve swap rate. C)central bank funds rate.

C is correct Required reserves are deposits with a country's central bank. Banks that deposit more than the required amount with the central bank are said to have excess reserves and may lend these to other banks.

A portfolio manager uses a computer model to estimate the effect on a portfolio's value from both a 3% increase in interest rates and a 5% depreciation in the euro relative to the yen. The manager is most accurately described as engaging in: A)stress testing. B)risk shifting. C)scenario analysis.

C is correct Scenario analysis involves modeling the effects of changes in multiple inputs at the same time. Stress testing examines the effects of changes in a single input. Risk shifting refers to managing a risk by modifying the distribution of outcomes.

Liam McCoy has lunch with a wealthy client whose portfolio he manages. McCoy advises the client to double his current position in the JKM Corporation due to an anticipated increase in sales. In accordance with Standard (V) Investment Analysis, Recommendations and Actions, when McCoy returns to his office he should: A)verify the suitability of the investment recommendation before placing the client's order. B)identify other clients for whom JKM may be a suitable investment and notify them immediately of his recommendation. C)document the details of the conversation with the client with regard to his investment recommendation.

C is correct Standard V(C) Record Retention requires that Members and Candidates document all recommendation and communications with clients. McCoy should document the details of the conversation, including any resulting investment decisions and/or actions. The suitability of the investment should have already been considered

One of the assumptions underlying the capital asset pricing model is that: A)each investor has a unique time horizon. B)only whole shares or whole bonds are available. C)there are no transactions costs or taxes.

C is correct The CAPM assumes frictionless markets, i.e., no taxes or transactions costs. Among the other assumptions of the CAPM are that all investors have the same one-period time horizon and that all investments are infinitely divisible.

The test of the equality of the variances of two normally distributed populations requires the use of a test statistic that is: A)z-distributed. B)Chi-squared distributed. C)F-distributed.

C is correct The F-distributed test statistic, F = s12 / s22, is used to compare the variances of two populations.

Which of the following best describes the underlying principles upon which the Global Investment Performance Standards (GIPS) are based? A)Uniformity and consistent application of standards for the global regulation of the securities industry. B)Fair and consistent application of a global set of regulatory requirements. C)Full disclosure and fair representation of performance results.

C is correct The GIPS standards are a set of voluntary standards based on the fundamental principles of full disclosure and fair representation of performance results.

Within the Global Investment Performance Standards (GIPS) are supplemental provisions which must be applied to which of the following asset classes? A)Emerging markets and private equity. B)Alternative investments and derivatives. C)Private equity and real estate.

C is correct The GIPS standards do not address performance measurement or coverage of all asset classes, but sections 6, 7 and 8 are supplemental provisions which must be specifically applied to private equity, real estate, and wrap fee/separately managed account (SMA) portfolios.

Which of the following indexes is a price weighted index? A)The New York Stock Exchange Index. B)The Standard and Poor's Index. C)The Nikkei Dow Index.

C is correct The Nikkei Dow Index is a price-weighted index. The other two are market value-weighted indexes.

Which of the following statements best describes an investment that is not on the efficient frontier? A.) There is a portfolio that has a lower return for the same risk. B.) The portfolio has a very high return. C.) There is a portfolio that has a lower risk for the same return.

C is correct The efficient frontier outlines the set of portfolios that gives investors the highest return for a given level of risk or the lowest risk for a given level of return. Therefore, if a portfolio is not on the efficient frontier, there must be a portfolio that has lower risk for the same return. Equivalently, there must be a portfolio that produces a higher return for the same risk.

The purchaser of a stock will receive the next dividend if the order is filled before the: A)holder-of-record date. B)payment date. C)ex-dividend date.

C is correct The ex-dividend date is the cutoff date for receiving the dividend and occurs one or two business days before the holder-of-record date. An investor who buys a share on or after the ex-dividend date will not receive the dividend.

The first step in developing a security market index is choosing the index's: A)weighting method. B)constituent securities. C)target market.

C is correct The first decision that must be made is choosing the target market the index will represent. Only then can the index provider determine which constituent securities should be included and which weighting scheme is most appropriate to measure the target market's returns.

Under which approach to valuing real estate properties is an analyst most likely to estimate a capitalization rate? A.) Comparable sales approach. B.) Cost approach. C.) Income approach.

C is correct The income approach estimates values by calculating the present value of expected future cash flows from property ownership or by dividing the net operating income (NOI) for a property by a capitalization rate. The comparable sales approach estimates a property value based on recent sales of similar properties. The cost approach is based on the estimated cost to replace an existing property.

***** remember for EXAM *********** The most likely result of increasing the estimated useful life of a depreciable asset is that: A)asset turnover will increase. B)return on assets will decrease. C)net profit margin will increase.

C is correct The longer the estimated useful life of an asset, the lower the annual depreciation expense charged to operations. *Lower depreciation expense results in higher net income, profit margins, and contributions to shareholder's equity.*

To determine whether monetary policy is expansionary or contractionary, an analyst should compare the central bank's policy rate to the: A)target inflation rate. B)trend rate of real growth. C)neutral interest rate.

C is correct The neutral interest rate is the sum of the trend rate of real economic growth and the target inflation rate. Monetary policy is expansionary if the policy rate is less than the neutral interest rate and contractionary if the policy rate is greater than the neutral interest rate.

The most likely use of a forward rate agreement is to: A)exchange a floating-rate obligation for a fixed-rate obligation. B)obtain the right, but not the obligation, to borrow at a certain interest rate. C)lock in an interest rate for future borrowing or lending.

C is correct The purpose of a forward rate agreement (FRA) is to lock in an interest rate for future borrowing or lending. An FRA is a forward commitment rather than a contingent claim. An interest rate swap is used to exchange a floating-rate obligation for a fixed-rate obligation.

The margin above or below LIBOR that is used to determine a floating-rate note's coupon payments is most accurately described as its: A)discount margin. B)required margin. C)quoted margin.

C is correct The quoted margin of a floating-rate note is the number of basis points added to or subtracted from the note's reference rate to determine its coupon payments. The required margin or discount margin is the number of basis points above or below the reference rate that would cause the note's price to return to par value at each reset date. Required margin may be different from quoted margin if a note's credit quality has changed since issuance.

Which of the following is *least likely* a service provided by an underwriter in the primary market? A)Risk Bearing. B)Origination. C)Diversification.

C is correct The underwriter provides the following services to the issuer: Origination, which involves the design, planning, and registration of the issue. Risk bearing, which means the underwriter guarantees the price by purchasing the securities. Distribution, which is the sale of the issue.

The difference between a hedge fund's trading net asset value and its accounting net asset value is that: A)accounting NAV tends to be higher because of estimated liabilities. B)accounting NAV tends to be lower because of model prices. C)trading NAV tends to be lower because of illiquid assets.

C is correct Trading NAV adjusts accounting NAV downward to account for illiquidity of a hedge fund's investments, such as positions that are large relative to trading volume.

When analyzing an industry characterized by increasing book values of equity, return on equity for a period is most appropriately calculated based on: A)beginning book value. B)ending book value. C)average book value.

C is correct When book values are not stable, analysts should calculate ROE based on the average book value for the period. When book values are more stable, beginning book value is appropriate.

For a long-term lease, the amount recorded initially by the lessee as a liability will most likely equal: A)the fair value of the leased asset. B)the total of the minimum lease payments. C)the present value of the minimum lease payments.

C is correct With a finance lease, both an asset and liability are reported on the lessee's balance sheet, equal to the present value of the promised lease payments.

A company with a return on equity (ROE) of 27%, required return on equity (ke) of 20%, and a dividend payout ratio of 40% has an implied sustainable growth rate closest to: A)12.00%. B)10.80%. C)16.20%.

C is correct g = (RR)(ROE) = (.60)(.27) = 0.162 or 16.2%

Which of the following will result from futures prices for a particular commodity being in contango? A)Positive current yield. B)Negative collateral yield. C)Negative roll yield.

C is correct during contago Future prices > spot prices

_______________________ measures the interest rate sensitivity of the value of a derivative. A.) Beta B.) Alpha C.) Rho D.) Duration

C is correct rho measures duration measures the interest rate sensitivity of the value of a fixed income security or portfolio the interest rate sensitivity of the value of a derivative

Which of the following statements is most accurate regarding monetarists? Monetarists believe that: A)discretionary monetary policy is the best way to moderate fluctuations in prices and output. B)fiscal policy is the most powerful of all government tools used to affect prices and output. C)steady, predictable money growth is the best monetary policy.

C is correct Monetarists believe that the Fed's tools are powerful and should not be used to moderate fluctuations in prices and outputs. Thus, steady, predictable growth is the best monetary policy. They believe in the power of the money supply, not fiscal policy, to affect prices and outputs.

Raising the reserve requirement is most likely an example of which type of monetary policy? A.) Neutral. B.) Expansionary. C.) Contractionary.

C is correct Raising reserve requirements should slow money supply growth.

Which of the following inputs is least likely required for the Markowitz efficient frontier? The: A)expected return of all securities. B)covariation between all securities. C)level of risk aversion in the market.

C is correct The model requires that investors know the expected return and variance of each security as well as the covariance between all securities.

which of the following statements regarding corporate shareholders is most acurate. A.) Cross shareholdings help promote corporate mergers B.) Dual- Class structures re used to align economic ownership with control C.) affiliated shareholders an protect a company against hostile takeovers bids

C is correct "affiliated shareholders" are part of or connected to management

If a fiscal budget deficit increases, which of the following factors must also increase if all other factors are held constant? A)Investment. B)Trade surplus. C)Savings.

C is correct (S-I) = (G-T) + (X-M) The relationship between the fiscal balance, savings, investment, and the trade balance is (G - T) = (S - I) - (X - M). An increase in a fiscal budget deficit (G - T) must be funded by an increase in savings (S), a decrease in investment (I), or a decrease in net exports (X - M), which would decrease a trade surplus or increase a trade deficit.

A Laspeyres price index tends to: A)understate the inflation rate because its market basket is fixed. B)overstate the inflation rate because its market basket is variable. C)overstate the inflation rate, because its market basket is fixed.

C is correct A Laspeyres price index tends to overstate the inflation rate because it uses fixed market basket weights from a base period. This does not consider that consumers will substitute away from goods that have risen dramatically in price.

Which of the following statements about an embedded call feature in a bond is least accurate? The call feature: A)exposes investors to additional reinvestment rate risk. B)reduces the bond's capital appreciation potential. C)increases the bond's duration, increasing price risk.

C is correct A call provision decreases the bond's duration because a call provision introduces prepayment risk that should be factored in the calculation.

Which type of issuer is most likely to issue bonds by auction? A)Corporate. B)Municipal. C)Sovereign.

C is correct Many national governments use auctions to issue sovereign bonds. Corporate bonds are typically issued in an underwriting or private placement process while municipal bonds are typically issued in a negotiated or underwritten process.

The form of regional trading agreement (RTA) least likely to have the unintended negative effect of reducing a member country's low-cost imports from a non-member country is a: A)customs union. B)common market. C)free trade area.

C is correct A free trade area removes barriers to trade among its members but does not require any of its members to change their trade policies with non-members. A common market and a customs union both impose uniformity on trade rules with non-member nations, which could restrict a member's low-cost imports from a nation that is not a member.

Which of the following orders is said to be "behind the market"? A)Limit sell order at 38 when the best ask is 39. B)Market sell order when the best bid is 38 and the best ask is 39. C)Limit buy order at 38 when the best bid is 39.

C is correct A limit buy order is behind the market if its *limit price is below the best bid*. A limit sell order is behind the market if its limit price is above the best ask. Market orders are never said to be behind the market.

The period of time within which a hedge fund must fulfill a redemption request is the: A)lockup period. B)withdrawal period. C)notice period.

C is correct A notice period, typically 30 to 90 days, is the amount of time a fund has after receiving notice of a redemption request to fulfill the redemption request. A lockup period is a minimum length of time before an investor may redeem shares or make withdrawals.

The period of time within which a hedge fund must fulfill a redemption request is the: A)withdrawal period. B)lockup period. C)notice period.

An analyst is testing the hypothesis that the mean excess return from a trading strategy is less than or equal to zero. The analyst reports that this hypothesis test produces a p-value of 0.034. This result most likely suggests that the: A)smallest significance level at which the null hypothesis can be rejected is 6.8%. B)best estimate of the mean excess return produced by the strategy is 3.4%. C)null hypothesis can be rejected at the 5% significance level.

C is correct A p-value of 0.035 means the hypothesis can be rejected at a significance level of 3.5% or higher

A pooled investment fund buys all the shares of a publicly traded company. The fund reorganizes the company and replaces its management team. Three years later, the fund exits the investment through an initial public offering of the company's shares. This pooled investment fund is best described as a(n): A)event-driven fund. B)venture capital fund. C)private equity fund.

C is correct A private equity fund or buyout fund is one that acquires entire public companies, takes them private, and reorganizes the companies to increase their value. An event-driven fund is a hedge fund that invests in response to corporate events such as mergers or acquisitions. Venture capital funds invest in start-up companies.

A synthetic collateralized debt obligation (CDO) is backed by a pool of: A)leveraged bank loans. B)other CDOs. C)credit default swaps

C is correct A synthetic CDO is backed by a pool of credit default swaps. Collateralized loan obligations (CLOs) are backed by a pool of leveraged bank loans. CDOs backed by a pool of other CDOs are an example of structured finance CDOs.

Which of the following statements best describes the impact of a valuation allowance on the financial statements? A valuation allowance: A)increases reported income, reduces assets, and reduces equity. B)reduces reported income, increases liabilities, and reduces equity. C)reduces reported income, reduces assets, and reduces equity.

C is correct A valuation allowance is a contra account (offset) against deferred tax assets that reflects the likelihood that the deferred tax assets will never be realized. The establishment of a valuation allowance reduces reported income, offsets (reduces) assets, and reduces equity.

Which of the following statements best describes the impact of a valuation allowance on the financial statements? A valuation allowance: A)reduces reported income, increases liabilities, and reduces equity. B)increases reported income, reduces assets, and reduces equity. C)reduces reported income, reduces assets, and reduces equity.

In the valuation of a real estate investment trust (REIT), subtracting the REIT's liabilities from the value of its real estate assets and dividing by the number of shares outstanding provides an estimate of the REIT's: A)free cash flow per share. B)adjusted funds from operations. C)net asset value.

C is correct An asset-based approach to valuing a REIT is to estimate its net asset value as the difference between the value of the REIT's real estate assets and its liabilities, divided by the number of shares outstanding.

Return and risk data on alternative investments may be affected by backfill bias if: A)the incorrect distribution is used to model volatility. B)data only include currently existing firms. C)a firm's historical returns are included when it is added to an index.

C is correct Backfill bias refers to bias introduced by including the previous performance data for firms added to a benchmark index.

Joe Bay, CFA, wants to test the hypothesis that the variance of returns on energy stocks is equal to the variance of returns on transportation stocks. Bay assumes the samples are independent and the returns are normally distributed. The appropriate test statistic for this hypothesis is: A)a t-statistic. B)a Chi-square statistic. C)an F-statistic.

C is correct Bay is testing a hypothesis about the equality of variances of two normally distributed populations. The test statistic used to test this hypothesis is an F-statistic. A chi-square statistic is used to test a hypothesis about the variance of a single population. A t-statistic is used to test hypotheses concerning a population mean, the differences between means of two populations, or the mean of differences between paired observations from two populations.

The least likely goal of a government's fiscal policy is to: A.) redistribute income and wealth. B.) influence aggregate national output. C.) ensure the stability of the purchasing power of its currency.

C is correct. Ensuring stable purchasing power is a goal of monetary rather than fiscal policy. Fiscal policy involves the use of government spending and tax revenue

An analyst wanting to assess the downside risk of an alternative investment is *least likely* to use the investment's: A.) Sortino ratio. B.) value at risk (VaR). C.) standard deviation of returns.

C is correct Both the Sortino ratio and the value-at-risk measure are both measures of downside risk.

A synthetic European put option includes a short position in: A)a European call option. B)a risk-free bond. C)the underlying asset.

C is correct C + B = S + P

**know for the exam** Capital transfers and sales of non-financial assets are included in which of the balance of payments accounts? A)Current account. B)Financial account. C)Capital account.

C is correct Capital transfers and sales of non-financial assets are sub-accounts of the capital account.

Use the following information to calculate cash flows from operations using the indirect method. Net Income: $12,000 Depreciation Expense: $1,000 Loss on sale of machinery: $500 Increase in Accounts Receivable: $2,000 Decrease in Accounts Payable: $1,500 Increase in Income taxes payable: $500 Repayment of Bonds: $3,000 A)Increase in cash of $9,500. B)Increase in cash of $7,500. C)Increase in cash of $10,500.

C is correct Cash flow from operations would be calculated as +Net Income $12,000 + Depreciation $1,000 + Loss on sale of machinery $500 − A/R $2,000 − A/P $1,500 + Income taxes payable $500 = $10,500.

Concentration measures are most likely to be used to: A)analyze barriers to entry into an industry. B)measure elasticity of demand facing an industry. C)identify the market structure of an industry.

C is correct Concentration measures are used to identify the market structure of an industry (perfect competition, monopolistic competition, oligopoly, or monopoly). Concentration measures do not directly indicate an industry's barriers to entry or elasticity of demand.

A company last paid a $1.00 dividend, the current market price of the stock is $20 per share and the dividends are expected to grow at 5 percent forever. What is the required rate of return on the stock? A)9.78%. B)10.00%. C)10.25%.

C is correct D0 (1 + g) / P0 + g = k 1.00 (1.05) / 20 + 0.05 = 10.25%.

An analyst gathered the following data: An earnings retention rate of 40%. An ROE of 12%. The stock's beta is 1.2. The nominal risk free rate is 6%. The expected market return is 11%. Assuming next year's earnings will be $4 per share, the stock's current value is closest to: A)$45.45. B)$26.67. C)$33.32.

C is correct Dividend payout = 1 - earnings retention rate = 1 - 0.4 = 0.6 RS = Rf + β(RM - Rf) = 0.06 + 1.2(0.11 - 0.06) = 0.12 g = (retention rate)(ROE) = (0.4)(0.12) = 0.048 D1 = E1 × payout ratio = $4.00 × 0.60 = $2.40 Price = D1 / (k - g) = $2.40 / (0.12 - 0.048) = $33.32

Effective duration is more appropriate than modified duration as a measure of a bond's price sensitivity to yield changes when: A)the bond has a low coupon rate and a long maturity. B)yield curve changes are not parallel. C)the bond contains embedded options.

C is correct Effective duration takes into consideration embedded options in the bond. Modified duration does not consider the effect of embedded options. For option-free bonds, modified duration will be similar to effective duration. Both duration measures are based on the value impact of a parallel shift in a flat yield curve.

Which of the following is the most likely result of a central bank's shift to an expansionary monetary policy? A)Interest rates increase. B)Domestic currency appreciates. C)Exports increase.

C is correct Expansionary monetary policy decreases interest rates. This should cause the domestic currency to depreciate, which should increase foreign demand for the country's exports.

What is the relationship between price and marginal revenue for a price searcher? A)Marginal revenue > price. B)Marginal revenue = price. C)Marginal revenue < price.

C is correct For a price searcher, demand is downward sloping, marginal revenue is less than price since price must be reduced to sell additional units of output.

A good for which consumers exhibit a negative income effect that is smaller than the substitution effect is most accurately described as a(n): A)Giffen good. B)Veblen good. C)inferior good.

C is correct For an inferior good the income effect is negative. A Giffen good is an inferior good for which the negative income effect is larger than the positive substitution effect, resulting in a decrease in consumption in response to a decrease in price. A Veblen good is not an inferior good, but rather a good that provides more utility to a consumer at a higher price than it provides at a lower price because the status benefits of ownership are greater at higher prices.

Compared to an American call option on a stock that does not pay a dividend, an otherwise identical European call option will have: A)a higher value. B)a lower value. C)the same value.

C is correct For call options on an underlying asset that does not pay cash flows, the right to exercise early is not valuable and therefore American and European options that are otherwise identical will have the same value.

If two fair coins are flipped and two fair six-sided dice are rolled, all at the same time, what is the probability of ending up with two heads (on the coins) and two sixes (on the dice)? A)0.4167. B)0.8333. C)0.0069.

C is correct For the four independent events defined here, the probability of the specified outcome is 0.5000 × 0.5000 × 0.1667 × 0.1667 = 0.0069.

Which of the following pooled investments is least likely to employ large amounts of leverage? A)Global macro hedge fund. B)Private equity buyout fund. C)Venture capital fund.

C is correct Hedge funds and buyout firms typically employ high leverage to acquire assets. Venture capital typically involves an equity interest.

A sequential-pay CMO has two tranches. Principal is paid to Tranche S until it is paid off, after which principal is paid to Tranche R. Compared to Tranche R, Tranche S has: A)more contraction risk and more extension risk. B)less contraction risk and more extension risk. C)more contraction risk and less extension risk.

C is correct In a sequential-pay CMO the short tranche, which receives principal payments and prepayments first, has more contraction risk, while the tranche that receives principal payments and prepayments last has more extension risk.

In an increasing price environment, what effect does a LIFO liquidation have on a firm's gross profit? A)Decrease. B)No effect. C)Increase.

C is correct In an increasing price environment, a LIFO liquidation increases gross profit because COGS includes older inventory layers of units at a cost lower than their current (replacement) cost. This increase is unsustainable because a firm can only sell from inventory until it is exhausted.

In order to more accurately estimate the cost of equity for a company situated in a developing market, an analyst should: A)use the yield on the sovereign debt of the developing country instead of the risk free rate when using the capital asset pricing model (CAPM). B)add a country risk premium to the risk-free rate when using the capital asset pricing model (CAPM). C)add a country risk premium to the market risk premium when using the capital asset pricing model (CAPM).

C is correct In order to reflect the increased risk when investing in a developing country, a country risk premium is added to the market risk premium when using the CAPM.

The formative stage of venture capital investing when capital is furnished for market research and product development is best characterized as the: A)angel investing stage. B)early stage. C)seed stage.

C is correct In the seed stage of venture capital investing, capital is furnished for product development, marketing, and market research.

Which of the following statements about the relationship between interest rates and the demand for and supply of money is most accurate? Interest rates affect: A)both the demand for and supply of money. B)the supply of money only. C)the demand for money only.

C is correct Interest rates only affect the demand for money. With higher interest rates, the opportunity cost of holding money increases, and people hold less money and more interest-earning assets. Monetary authorities determine the supply of money. Therefore, the supply of money is independent of the interest rate.

Key rate duration is best described as a measure of price sensitivity to a: A)change in a bond's cash flows. B)parallel shift in the benchmark yield curve. C)change in yield at a single maturity.

C is correct Key rate duration is the price sensitivity of a bond or portfolio to a change in the interest rate at one specific maturity on the yield curve.

C is correct Management fee = €90 million × 0.02 = €1.8 million. Gross return = (€90 / €75) - 1 = 20.0%. The soft hurdle rate was exceeded. Because of the high water mark, incentive fees are paid only on the increase in NAV above the previous year-end NAV after fees of €80 million. Incentive fee = (€90 million - €80 million) × 0.20 = €2.0 million. Total fee: €1.8 million + €2.0 million = €3.8 million. Note that the new high water mark is €90 million - €3.8 million = €86.2 million.

Nelson, Inc. has fixed financing costs of $3 million, fixed operating costs of $5 million, and variable costs of $2.00 per unit. If the price of Nelson's product is $4.00, Nelson's operating breakeven quantity of sales is: A)1.0 million units. B)4.0 million units. C)2.5 million units.

C is correct Operating breakeven quantity = fixed operating costs / (price - variable cost per unit) = $5 million / ($4.00 - $2.00) = 2,500,000 units.

Which of the following duration measures is most appropriate if an analyst expects a non-parallel shift in the yield curve? A)Modified duration. B)Effective duration. C)Key rate duration.

C is correct Price sensitivity to a non-parallel shift in the yield curve can be estimated using key rate durations. Modified duration and effective duration measure price sensitivity to a parallel shift in the yield curve.

Reconstitution of an index refers to: A)adjusting the weights of the securities that constitute the index. B)changing the methodology used to calculate the value of the index. C)removing some securities from the index and adding others.

C is correct Reconstitution begins with evaluating the securities in an index against the index's criteria. Securities that are no longer representative of the index are removed and replaced with different securities that do meet the criteria

An example of a secondary source of liquidity is: A)trade credit and bank lines of credit. B)cash flow management. C)negotiating debt contracts.

C is correct Secondary sources of liquidity include negotiating debt contracts, liquidating assets, and filing for bankruptcy protection and reorganization. Primary sources of liquidity include ready cash balances, short-term funds (e.g., trade credit and bank lines of credit), and cash flow management.

The marginal cost of capital is: A)tied solely to the specific source of financing. B)equal to the firm's weighted cost of funds. C)the cost of the last dollar raised by the firm.

C is correct The "marginal" cost refers to the last dollar of financing acquired by the firm assuming funds are raised in the same proportion as the target capital structure. It is a percentage value based on both the returns required by the last bondholders and stockholders to provide capital to the firm.

A Type II error: A)rejects a true null hypothesis. B)fails to reject a true null hypothesis. C)fails to reject a false null hypothesis.

C is correct The chance of making a Type II error is called beta risk.

When potential real GDP is GREATER THAN actual real GDP, the economy is most likely experiencing: A)inflation. B)underemployment. C)recession.

C is correct The economy is in an inflationary phase if actual real GDP is greater than potential real GDP. When actual real GDP equals potential real GDP, the economy is said to be at full employment. The economy is in a recessionary phase if real GDP is less than potential GDP.

Which of the following statements concerning the efficient frontier is most accurate? It is the: A)set of portfolios that gives investors the highest return. B)set of portfolios that gives investors the lowest risk. C)set of portfolios where there are no more diversification benefits.

C is correct The efficient frontier outlines the set of portfolios that gives investors the highest return for a given level of risk or the lowest risk for a given level of return. It is also the point at which there are no more benefits to diversification.

For a given bond, the duration is 8 and the convexity is 100. For a 60 basis point decrease in yield, what is the approximate percentage price change of the bond? A)2.52%. B)4.62%. C)4.98%.

C is correct The estimated price change is -(duration)(∆YTM) + (½)(convexity) × (∆YTM)2 = -8 × (-0.006) + (½)(100) × (-0.0062) = +0.0498 or 4.98%.

**know for the exam** The one-year spot rate is 6% and the one-year forward rates starting in one, two and three years respectively are 6.5%, 6.8%, and 7%. What is the four-year spot rate? A)6.51%. B)6.58%. C)6.57%.

C is correct The four-year spot rate is computed as follows: Four-year spot rate = [(1 + 0.06)(1 + 0.065)(1 + 0.068)(1 + 0.07) ]1/4 - 1 = 6.57%

All else equal, a firm's business risk is higher when: A)variable costs are the highest portion of its expense. B)the firm has low operating leverage. C)fixed costs are the highest portion of its expense.

C is correct The higher the percentage of a firm's costs that are fixed, the higher the operating leverage, and the greater the firm's business risk and the more susceptible it is to business cycle fluctuations.

The industry experience curve illustrates the relationship between: A)productivity and average years of employment. B)company age and profitability. C)cumulative output and cost per unit.

C is correct The industry experience curve shows cost per unit relative to cumulative output. Cost per unit typically decreases over time due to higher utilization rates for fixed capital, improvements in the efficiency of labor, and better product design and manufacturing methods.

Computing the internal rate of return of the inflows and outflows of a portfolio would give the: A)time-weighted return. B)net present value. C)money-weighted return.

C is correct The money-weighted return is the internal rate of return on a portfolio that equates the present value of inflows and outflows over a period of time.

Which probability rule determines the probability that at least one two events will occur? A)The total probability rule. B)The multiplication rule. C)The addition rule.

C is correct The multiplication rule is used to determine the joint probability of two events. The addition rule is used to determine the probability that at least one of two events will occur. The total probability rule is utilized when trying to determine the unconditional probability of an event.

Assume 30% of the CFA candidates have a degree in economics. A random sample of three CFA candidates is selected. What is the probability that none of them has a degree in economics? A)0.027. B)0.900. C)0.343.

C is correct The probability of 0 successes in 3 trials is: [3! / (0!3!)] (0.3)^0 (0.7)^3 = 0.343

A company primarily engaged in the production of cement has the following characteristics: - Beta = 0.8. - Market value debt = $180 million. - Market value equity = $540 million. - Effective tax rate = 25%. - Marginal tax rate = 34%. The asset beta that should be used by a company considering entering into cement production is closest to: A)0.640. B)0.725. C)0.656.

C is correct The unlevered (asset) beta is 0.8{1 / [1 + (1 - 0.34)(180 / 540)]} = 0.656.

**know for the exam** Tapley Acquisition, Inc., is considering the purchase of Tangent Company. The acquisition would require an initial investment of $190,000, but Tapley's after-tax net cash flows would increase by $30,000 per year and remain at this new level forever. Assume a cost of capital of 15%. Should Tapley buy Tangent? A)No, because k > IRR. B)Yes, because the NPV = $30,000. C)Yes, because the NPV = $10,000.

C is correct This is a perpetuity. PV = PMT / I = 30,000 / 0.15 = 200,000 200,000 - 190,000 = 10,000

A local high school basketball team had 18 home games this season and averaged 58 points per game. If we assume that the number of points made in home games is normally distributed, which of the following is most likely the range of points for a confidence interval of 90%? A)26 to 80. B)24 to 78. C)34 to 82.

C is correct This question has a bit of a trick. To answer this question, remember that the mean is at the midpoint of the confidence interval. The correct confidence interval will have a midpoint of 58. (34 + 82) / 2 = 58.

Monopolists will maximize profit by producing at an output level where which of the following conditions exists? A)Price = demand = marginal revenue = marginal cost. B)Price = marginal revenue = marginal cost. C)Marginal revenue = marginal cost < price.

C is correct To maximize profit, monopolists will expand output until marginal revenue equals marginal cost. Price will be greater than marginal revenue because a monopolist faces a downward sloping demand curve.

The top-down analysis approach is most likely to be employed in which step of the portfolio management process? A)The planning step. B)The feedback step. C)The execution step.

C is correct Top-down analysis would be used to select securities in the execution step.

A company that reports under IFRS has developed a new product which required research costs of $2 million and development costs of $3 million. The maximum amount the company can record as the value of the new product on its balance sheet is: A)$5 million. B)zero. C)$3 million.

C is correct Under IFRS, research costs must be expensed but development costs, under certain circumstances, may be capitalized.

Which of the following statements about the role of depreciable lives and salvage values in the computation of depreciation expenses for financial reporting is most accurate? A)The estimated useful life of the same depreciable asset should be the same regardless of which company owns the asset. B)Companies are specifically required to disclose data about estimated salvage values in the footnotes to the financial statements. C)Depreciable lives and salvage values are chosen by management and allow for the possibility of income manipulation.

C is correct Useful lives and salvage values of long-lived assets are management estimates that may vary among companies. Companies typically do not disclose data about estimated salvage values, except when estimates are changed.

Which of the following is the most accurate definition of the velocity of money? The velocity of money is the: A)money supply of a country divided by its price level. B)GDP of a country divided by its price level. C)GDP of a country divided by its money supply.

C is correct Velocity is the average number of times per year each dollar is used to buy goods and services (velocity = nominal GDP / money). Therefore, the money supply multiplied by velocity must equal nominal GDP. The equation of exchange must hold with velocity defined in this way. Letting money supply = M, velocity = V, price = P, and real output = Y, the equation of exchange may be symbolically expressed as: MV = PY.

When a regulatory agency requires a monopolist to use average cost pricing, the intent is to produce the quantity where the: A)average total cost curve intersects the marginal revenue curve. B)marginal revenue curve intersects the marginal cost curve. C)the market demand curve intersects the average total cost curve.

C is correct When a regulatory agency requires a monopolist to use average cost pricing, the intent is to price the product where the average total cost curve intersects the market demand curve. There are problems in using this method, e.g., determining exactly what the average total cost really is.

The condition that occurs when a company disburses cash too quickly, stretching the company's cash reserves, is best described as a: A)drag on liquidity. B)liquidity premium. C)pull on liquidity.

C is correct When cash payments are made too quickly, the condition is known as a pull on liquidity. A drag on liquidity occurs when cash inflows lag.

When the economy enters an expansion phase, the most likely effect on external trade is a(n): A)increase in exports. B)decrease in exports. C)increase in imports.

C is correct When the domestic economy is expanding, demand for imports is likely to increase as domestic incomes increase. Exports tend to be independent of domestic economic growth and are more closely related to trading partners' economic growth.

Which of the following would a technical analyst most likely interpret as a "buy" signal? A)20-day moving average crosses below a 100-day moving average. B)30-day moving average crosses above a 5-day moving average. C)10-day moving average crosses above a 60-day moving average.

C is correct When using moving averages to generate trading signals, a "golden cross" of a shorter-term average above a longer-term average is a buy signal, while a "dead cross" under the longer-term average is a sell signal.

A firm that invests the majority of a portfolio to track a benchmark index, and uses active investment strategies for the remaining portion, is said to be using: A)strategic asset allocation. B)risk budgeting. C)a core-satellite approach.

C is correct With a core-satellite approach, a firm invests the majority of a portfolio passively and uses active strategies for the remaining portion. Strategic asset allocation refers to specifying the percentages of a portfolio's value to allocate to specific asset classes. Risk budgeting refers to allocating a portfolio's overall permitted risk among strategic asset allocation, tactical asset allocation, and security selection.

risk that can be attributed to factors that impact a company or industry is best described as A.) Market risk B.) Systematic risk C.) Unsystematic risk

C is correct systematic risk and market risk are essentially the same thing

For a firm to use the revaluation model for balance sheet reporting of long-lived assets: A)the firm must choose which assets of each type to revalue, and which to report at cost. B)the firm must report under U.S. GAAP. C)an active market must exist for the assets.

C is correct under IFRS, a firm may use the revaluation model for long-lived assets that have an active market which can be used to determine the fair value of the assets.

Which of the following is most likely to be a characteristic of a Giffen good? Its: A.) substitution effect is negative. B.) demand curve slopes downward. C.) income effect is negative.

C is correct. A Giffen good is an inferior good. All inferior goods have a negative income effect (less is purchased as income rises). While the substitution effect is always positive for all goods,

A South African company issues bonds denominated in pound sterling that are sold to investors in the United Kingdom. These bonds can be best described as: A.) Eurobonds. B.) global bonds. C.) foreign bonds.

C is correct. Bonds sold in a country and denominated in that country's currency by an entity from another country are referred to as foreign bonds.

A forward rate agreement most likely differs from most other forward contracts because: A.) positions cannot be closed out prior to maturity. B.) it involves an option component. C.) its underlying is not an asset.

C is correct. Forward rate agreements, unlike most other forward contracts, do not have an asset as an underlying. Instead, the underlying is an interest rate.

Commodity futures prices are most likely in backwardation when: A.) interest rates are high. B.) storage costs are high. C.) the convenience yield is high.

C is correct. In backwardation, futures prices are lower than spot prices, that is, the commodity forward curve is downward sloping. This scenario occurs when the convenience yield is high. Futures price ≈ Spot price (1 + r) + Storage costs − Convenience yield. The futures market is in backwardation when the convenience yield is higher than the cost of carry.

At expiration, a European put option will be valuable if the exercise price is: A.) less than the underlying price. B.) equal to the underlying price. C.) greater than the underlying price.

C is correct. A European put option will be valuable at expiration if the exercise price is greater than the underlying price. The holder can put (deliver) the underlying and receive the exercise price which is higher than the spot price. A European put option would be worthless if the exercise price was equal to or less than the underlying price.

If interest rates are expected to increase, the coupon payment structure most likely to benefit the issuer is a: A.) step-up coupon. B.) inflation-linked coupon. C.) cap in a floating-rate note.

C is correct. A cap in a floating-rate note (capped FRN) prevents the coupon rate from increasing above a specified maximum rate. This feature benefits the issuer in a rising interest rate environment because it sets a limit to the interest rate paid on the debt. A is incorrect because step up would benefit the bondholder not the issuer

An arbitrage transaction generates a net inflow of funds: A.) throughout the holding period. B.) at the end of the holding period. C.) at the start of the holding period.

C is correct. Arbitrage is a type of transaction undertaken when two assets or portfolios produce identical results but sell for different prices. A trader buys the asset or portfolio with the lower price and sells the asset or portfolio with the higher price, generating a net inflow of funds at the start of the holding period

Based on typical labor utilization patterns across the business cycle, productivity (output per hours worked) is most likely to be highest: A.) at the peak of a boom. B.) into a maturing expansion C.) at the bottom of a recession.

C is correct. At the end of a recession, firms will run "lean production" to generate maximum output with the fewest number of workers.

The longest-term tranche of a sequential-pay CMO is *most likely* to have the lowest: A.) average life. B.) extension risk. C.) contraction risk.

C is correct. For a CMO with multiple sequential-pay tranches, the longest-term tranche will have the lowest contraction (prepayments greater than forecasted) risk because of the protection against this risk offered by the other tranches. The longest-term tranche is likely to have the highest average life and extension risk because it is the last tranche repaid in a sequential-pay tranche.

Which of the following conditions is least likely to increase a country's GDP? A.) An increase in net exports. B.) Increased investment in capital goods. C.) Increased government transfer payments.

C is correct. Government transfer payments, such as unemployment compensation or welfare benefits, are excluded from GDP.

A bond market in which a communications network matches buy and sell orders initiated from various locations is best described as an: A.) organized exchange. B.) open market operation. C.) over-the-counter market.

C is correct. In over-the-counter (OTC) markets, buy and sell orders are initiated from various locations and then matched through a communications network. Most bonds are traded in OTC markets. A is incorrect because on organized exchanges, buy and sell orders may come from anywhere, but the transactions must take place at the exchange according to the rules imposed by the exchange. B is incorrect because open market operations refer to central bank activities in secondary bond markets. Central banks buy and sell bonds, usually sovereign bonds issued by the national government, as a means to implement monetary policy.

Which of the following hedge fund strategies is most likely categorized as an event-driven strategy? A.) Fixed-income convertible arbitrage B.) Quantitative directional C.) Merger arbitrage

C is correct. Merger arbitrage is an event-driven strategy that involves buying the stock of the company being acquired and selling the stock of the acquiring company when the merger and acquisition (M&A) transaction is announced.

The inventory/sales ratio is most likely to be rising: A.) as a contraction unfolds. B.) partially into a recovery. C.) near the top of an economic cycle.

C is correct. Near the top of a cycle, sales begin to slow before production is cut, leading to an increase in inventories relative to sales.

The price of a swap typically: A.) is zero at initiation. B.) fluctuates over the life of the contract. C.) is obtained through a process of replication.

C is correct. Replication is the key to pricing a swap. The swap price is determined at initiation by replication. The value (not the price) of the swap is typically zero at initiation and the fixed swap price is typically determined such that the value of the swap will be zero at initiation.

Sovereign bonds are best described as: A.) bonds issued by local governments. B.) secured obligations of a national government. C.) bonds backed by the taxing authority of a national government.

C is correct. Sovereign bonds are usually unsecured obligations of the national government issuing the bonds; they are not backed by collateral, but by the taxing authority of the national government. A is incorrect because bonds issued by local governments are non-sovereign (not sovereign) bonds. B is incorrect because sovereign bonds are typically unsecured (not secured) obligations of a national government.

Which of the following factors most likely explains why the spot price of a commodity in short supply can be greater than its forward price? A.) Opportunity cost B.) Lack of dividends C.) Convenience yield

C is correct. The convenience yield is a benefit of holding the asset and generally exists when a commodity is in short supply. The future value of the convenience yield is subtracted from the compounded spot price and reduces the commodity's forward price relative to it spot price.

Monetary policy is least likely to include: A.) setting an inflation rate target. B.) changing an official interest rate. C.) enacting a transfer payment program

C is correct. Transfer payment programs represent fiscal, not monetary policy.

Do gains and losses, as well as expenses appear on the income statement? A)Only gains and losses appear on the income statement. B)Only expenses appear on the income statement. C)Both appear on the income statement.

C is correct?

A "Best offer" is a A.) Highest bid B.) Highest ask C.) Lowest bid D.) Lowest ask

D is correct the best offer is also known as the lowest ask price

A Fiscal Budget surplus occurs when occurs when A.) Policy rate < neutral rate B.) Government spending > Tax revenue C.) Policy rate > neutral rate D.) Government spending < Tax revenue

D is correct A -- is Expansionary monetary policy B.) -- Budget deficit C.) -- is contractionary monetary policy

convertible bonds can be potentially anti-dilutive and if exercised (Increase/Decrease) EPS

Decrease

The stakeholders most likely to be concerned with their legal liabilities are: A)directors. B)regulators. C)creditors.

Directors are legally responsible for their decisions and actions as board members. Neither regulators nor creditors face significant legal liabilities for their actions.

what is the formula for financial leverage?

EBIT/EBIT - I

Matching What is the formula for Financial leverage? What is the formula Total Asset turnover? What is the formula ROE? A.) NI/Rev B.) Rev/ Avg Assets C.) Assets/ Total Equity D.) Assets / Avg equity E.) Rev / Total assets F.) NI/ Avg. Equity G.) Ni / Total Equity

Fin lev = D TAT = B ROE = F

Which of the following assets are best characterized as contracts? A)Currency swaps. B)Commercial paper. C)Depository receipts. D.) Fowards E.) Options F.) All ob the above G.) A, D and E

G Contracts include forwards, futures, options, swaps, and insurance contracts. Commercial paper is a debt security. Depository receipts are shares in a pooled investment vehicle, such as a mutual fund or an exchange-traded fund.

Assume an investor purchases a stock for $50. One year later, the stock is worth $60. After one more year, the stock price has fallen to the original price of $50. Calculate the continuously compounded return for year 1 and year 2. ---- Year 1-- Year 2 A)18.23%----18.23% B)18.23%----16.67% C)-18.23%---18.23%

Given a holding period return of R, the continuously compounded rate of return is: ln(1 + R) = ln(Price1/Price0). Here, if the stock price increases to $60, r = ln(60/50) = 0.18232, or 18.23%. The return for year 2 is ln(50/60), or ln(0.833) = negative 18.23%.

Capitalizing costs will result in (Lower/Higher) future earnings?

Higher

The optimal portfolio on the efficient frontier for each investor is the one with the (Lowest/Highest) indifference curve that is tangent to the efficient frontier.

Highest

**read passage on relationship B/T quoted and required margin*** If the required margin on a floating rate note is greater than the quoted margin, it is most likely that the: A)credit quality of the FRN has decreased. B)reference rate on the FRN has increased. C)bond will be priced above par at the reset date.

If the required margin is greater than the quoted margin, the credit quality of the bond must have decreased and the bond will be priced below par at the reset date.

Trademarks that can be renewed at minimal cost are also considered to be intangible assets with (Definite/Infinite) lives.

Indefinite similar to goodwill

Under IFRS is Goodwill will amortized?

No under IFRS or GAAP good will isn't amortized but instead tested for an impairment annually

The price value of a basis point (PVBP) for a 18 year, 8% annual pay bond with a par value of $1,000 and yield of 9% is closest to: A)$0.80. B)$0.44. C)$0.82.

PVBP = ((initial price)- (price if yield changed by 1 bps)) Initial price:Price with change: FV = 1000 ------------FV = 1000 PMT = 80 -------------PMT = 80 N = 18 ----------------N = 18 I/Y = 9% --------------I/Y = 9.01 CPT PV = 912.44375 --------CPT PV = 911.6271 PVBP = 912.44375 - 911.6271 = 0.82 ****C is correct****

______ measures the interest rate sensitivity of the value of a derivative.

RHO

The three main sources of return for commodities futures contracts most likely are: A.) convenience yield, dividend yield, and spot price return. B.) collateral yield, roll yield, and spot price return. C.) collateral yield, convenience yield, and roll yield.

SPot the CObRO Spot, Collateral yield, Roll yield B is correct *****

Business risk combines both ____________ risk and __________ Risk

Sales and operating Risk DOL = % change in EBIT / % change in sales = Q(P-V) / Q (P-V) - F

monopolists are price (takers/searchers)?

Searchers

A very large company has twice as many male employees relative to female employees. If a random sample of four employees is selected, what is the probability that all four employees selected are female? A)0.3333. B)0.0625. C)0.0123.

Since there are twice as many male employees to female employees, P(male) = 2/3 and P(female) = 1/3. Therefore, the probability of 4 "successes" = (0.333)^4 = 0.0123.

which of the following isn't a (External) macroeconomic factor? Economic output, inflation, tax rate, interest rate, credit availability

Tax rates is a external government factor

For a given bond, the duration is 8 and the convexity is 100. For a 60 basis point decrease in yield, what is the approximate percentage price change of the bond? A)4.98%. B)2.52%. C)4.62%.

The estimated price change is -(duration)(∆YTM) + (½)(convexity) × (∆YTM)^2 = -8 × (-0.006) + (½)(100) × (-0.006^2) = +0.0498 or 4.98%.

A portfolio manager invests 40% of a portfolio in Asset X, which has an expected standard deviation of returns of 15%, and the remainder in Asset Y, which has an expected standard deviation of returns of 25%. If the covariance of returns between assets X and Y is 0.0158, the expected standard deviation of portfolio returns is closest to: A)2.7%. B)16.3%. C)18.4%.

[0.402 × 0.152 + 0.602 × 0.252 + 2(0.40 × 0.60 × 0.0158)]^1/2 = 18.35%. C is correct

In most countries including the United States, debenture is defined as: A)an unsecured bond. B)a bond secured by specific assets. C)a short-term debt instrument.

a is correct

Which of the following measures produces the same portfolio rankings as the Sharpe ratio but is stated in percentage terms? A)Treynor measure. B)M-squared. C)Jensen's alpha.

b M-squared measures the excess return of a leveraged portfolio relative to the market portfolio and produces the same portfolio rankings as Sharpe ratio.

In most countries including the United States, debenture is defined as: A)a short-term debt instrument. B)a bond secured by specific assets. C)an unsecured bond.

c In most countries a debenture is defined as unsecured debt.

c is correct Management fee = £120.0 × 2.0% = £2.4 million. Gross value at end of year (given) = £120.0 million. Gross return = (£120.0 / £100.0) - 1 = 20.0%. The soft hurdle rate of 2.5% + 2.5% = 5.0% was exceeded. Incentive fee = (£120.0 - £100.0 - £2.4) × 20% = £3.52 million. Total fee = £2.40 + £3.52 = £5.92 million. Net of fee: £120.00 - £5.92 = £114.08 million. Net return = (£114.08 / £100.00) - 1 = 14.1%.

Country G and Country H have currencies that trade freely and have markets for forward currency contracts. If Country G has an interest rate greater than that of Country H, the no-arbitrage forward G/H exchange rate is: A)less than the G/H spot rate. B)greater than the G/H spot rate. C)equal to the G/H spot rate.

forward/ spot = {1+ interest rate(Country G)}/{1+ interest rate(Country H) If the interest rate in Country G is greater than the interest rate in Country H, the numerator is greater than the denominator on the right side of the equation. The left side must have the same relationship, so the forward rate must be greater than the spot rate. (Study Session 5, Module 18.2, LOS 18.f)

Monopolistic competition is another name for competitive (price-taker/price-searcher) markets.

price searcher

Jack is risk adverse which of the following is most likely? A.) His risk tolerance is relatively low B.) He may hold some very risky assets C.) He wil choose relatively safe investmetns

risk adverse means to take on more risk you need to be rewarded with higher return for that increase in risk B is correct if you are rewarded for the amount of risk he MAY hold some very risky assets

What is the 95% confidence interval for a population mean with a known population variance of 9, based on a sample of 400 observations with mean of 96? A)95.706 to 96.294. B)95.613 to 96.387. C)95.118 to 96.882.

x ± zα/2 × (σ / n1/2) = 96 ± 1.96 × (9^1/2 / 400^1/2) = 96 ± 1.96 × (0.15) = 96 ± 0.294 = 95.706 to 96.294. A is correct

A UK 12-year corporate bond with a 4.25% coupon is priced at £107.30. This bond's duration and convexity are 9.5 and 107.2. If the bond's yield decreases by 125 basis points, the estimated price of the bond is closest to: A)£112.72. B)£120.95. C)£121.84.

−(9.5 × −0.0125) + (1/2) × (107.2) × (−0.0125)2≈ 0.1188 + 0.0084≈ 0.1272 or 12.72% = (1 + 0.1272) × 107.30= ***120.95***

a 30 day, $10,000, US T-Bill sells for $9,932.4. the discount-basis yield % is closest to? A.) 8.11 B.) 8.17 C.) 8.28

A IS CORRECT DBY = (Face value - purchase price / face value) * 360 / days to maturity DBY = 10,000 - 9,932.4/10,000 * 360/30 = 8.112%

How will dilutive securities affect earnings per share (EPS) when determining diluted earnings per share? A)Decrease EPS. B)Increase EPS. C)Either decrease or increase EPS depending upon if the security is dilutive or antidilutive.

A Dilutive securities such as convertibles and options are found in a complex capital structure and always decrease EPS. Convertibles and options may also be antidilutive, which will increase EPS hence the name antidilutive.

Which measure of central tendency can be used for both numerical and categorical variables? A)Mode. B)Mean. C)Median.

A The mode is the only choice that makes sense since you cannot take an average or median of categorical data such as bond ratings (AAA, AA, A, etc.) but the mode is simply the most frequently occurring number or category.

In which of the following exchange rate regimes can a country participate *without giving up its own currency*? A)Target zone or conventional fixed peg. B)Monetary union or currency board. C)Crawling peg or formal dollarization.

A With *formal dollarization or a monetary union*, a country does not have its own currency. With a currency board, conventional fixed peg, target zone, or crawling peg, a country has its own currency and manages its exchange rate with another currency or basket of currencies.

A stock priced at $10 has a 60% probability of moving up and a 40% probability of moving down. If it moves up, it increases by a factor of 1.06. If it moves down, it decreases by a factor of 1/1.06. What is the expected stock price after two successive periods? A)$10.27. B)$10.03. C)$11.24.

A f the stock moves up twice, it will be worth $10 × 1.06 × 1.06 = $11.24. The probability of this occurring is 0.60 × 0.60 = 0.36. If the stock moves down twice, it will be worth $10 × (1/1.06) × (1/1.06) = $8.90. The probability of this occurring is 0.40 × 0.40 = 0.16. If the stock moves up once and down once, it will be worth $10 × 1.06 × (1/1.06) = $10.00. This can occur if either the stock goes up then down or down then up. The probability of this occurring is 0.60 × 0.40 + 0.40 × 0.60 = 0.48. Multiplying the potential stock prices by the probability of them occurring provides the expected stock price: ($11.24 × 0.36) + ($8.90 × 0.16) + ($10.00 × 0.48) = $10.27.

Inflation resulting from a decrease in taxes is most likely: A)demand-pull inflation. B)stagflation. C)cost-push inflation.

A A decrease in taxes, other things equal, will increase personal disposable income and the consumption spending component of aggregate demand

Income elasticity is defined as the: A)percentage change in the quantity demanded divided by the percentage change in income. B)change in quantity demanded divided by the change in income. C)percentage change in income divided by the percentage change in the quantity demanded.

A Income elasticity is defined as the percentage change in quantity demanded divided by the percentage change in income. Normal goods have positive values for income elasticity and inferior goods have negative income elasticities. QUANTITY DEMANDED is always in the numerator

When the price of a good decreases, how do the income effect and the substitution effect change the quantity demanded of the good? A)The substitution effect increases the quantity demanded, but the income effect may increase or decrease the quantity demanded. B)The income effect increases the quantity consumed, but the substitution effect may increase or decrease the quantity demanded. C)Both the income effect and the substitution effect increase the quantity demanded.

A The substitution effect is a shift in consumption toward a larger quantity of a good that decreases in price. A decrease in the price of a good also has an income effect because the old bundle costs less. The income effect may result in consumption of a larger or smaller quantity of the good that has decreased in price, depending on whether it is a normal good or an inferior good.

A test of the population variance is equal to a hypothesized value requires the use of a test statistic that is: A)Chi-squared distributed. B)t-distributed. C)F-distributed.

A is correct

Policies that can be used as tools for redistribution of wealth and income include: A)fiscal policy only. B)both fiscal policy and monetary policy. C)monetary policy only.

A is correct

When sampling from a nonnormal distribution with an known variance, which statistic should be used if the sample size is large and if the respective sample size is small? A)z-statistic; not available. B)z-statistic; z-statistic. C)t-statistic; t-statistic.

A is correct

When using the indirect method for computing cash flow from operating activities, a change in accounts payable will require which of the following? A)A positive (negative) adjustment to net income when accounts payable increases (decreases). B)A negative (positive) adjustment to net income when accounts payable increases (decreases). C)A negative adjustment to net income regardless of whether accounts payable increases or decreases.

A is correct

Where in the financial statements should a firm recognize the unrealized gains and losses on cash flow hedging derivatives and the unrealized gains and losses on available-for-sale securities? Cash flow hedging derivatives ----- Available-for-sale securities A)Other comprehensive income ---- Other comprehensive income B)Net income ---- Other comprehensive income C)Other comprehensive income ---- Net income

A is correct

With respect to exchange rate regimes, crawling bands are most likely used in a transition toward: A)floating exchange rates. B)a monetary union. C)a fixed peg arrangement.

A is correct

Inflation resulting from a decrease in taxes is most likely: A)demand-pull inflation. B)cost-push inflation. C)stagflation.

A is correct A decrease in taxes, other things equal, will increase personal disposable income and the consumption spending component of aggregate demand. An increase in aggregate demand from a position of long-run equilibrium is the most likely cause of demand-pull inflation.

An example of a contractionary fiscal policy change is a(n): A)increase in a fiscal surplus. B)decrease in a fiscal surplus. C)increase in a fiscal deficit.

A is correct An increase in a fiscal surplus or a decrease in a fiscal deficit is contractionary. An increase in a fiscal deficit or a decrease in a fiscal surplus is expansionary.

The sale of obsolete equipment would be classified as: A)investing cash flow. B)operating cash flow. C)financing cash flow.

A is correct The sale of equipment is classified as investing cash flow.

**KNOW FOR THE EXAM** Joe Bay, CFA, wants to test the hypothesis that the variance of returns on energy stocks is equal to the variance of returns on transportation stocks. Bay assumes the samples are independent and the returns are normally distributed. The appropriate test statistic for this hypothesis is: A)an F-statistic. B)a t-statistic. C)a Chi-square statistic.

A is correct Bay is testing a hypothesis about the equality of variances of two normally distributed populations. The test statistic used to test this hypothesis is an F-statistic. A chi-square statistic A t-statistic is used to test hypotheses concerning a population mean, the differences between means of two populations, or the mean of differences between paired observations from two populations.

Changes in asset lives and salvage values are changes in accounting: A)estimates and are applied prospectively. B)principle and are applied retrospectively. C)estimates and are applied retrospectively.

A is correct Changes in asset lives and salvage value are changes in accounting estimates and are not considered changes in accounting principle. Changes in accounting estimates are applied prospectively.

if the tax expense is *Less Than* the tax payable then a ________________ should be recorded? A.) Deferred Tax Asset B.) Deferred Tax Liability

A is correct DFA = Tax Payable > Tax Expense

The year-end financial statements for a firm using LIFO inventory accounting show an inventory level of $5,000, cost of goods sold of $16,000, and inventory purchases of $14,500. If the LIFO reserve is $4,000 at year-end and was $1,500 at the beginning of the year, what would the cost of goods sold have been using FIFO inventory accounting? A)$13,500. B)$18,500. C)$12,000.

A is correct FIFO COGS = LIFO COGS − change in LIFO reserve = $16,000 − ($4,000 − $1,500) = $13,500.

Under IFRS, a lessor retains the leased asset on its balance sheet for: A)operating leases, but not finance leases. B)finance leases, but not operating leases. C)neither finance leases not operating leases.

A is correct For an operating lease, the lessor retains the leased asset on its balance sheet and recognizes depreciation expense over its life. For a finance lease, the lessor removes the leased asset from its balance sheet and *recognizes a lease receivable*.

If the GDP deflator is less than 100, then real GDP is: A)greater than nominal GDP. B)less than nominal GDP. C)equal to nominal GDP.

A is correct GDP deflator = Nominal / Real GDP

A country's labor force is projected to decrease by 2% while its labor productivity is projected to increase by 3% per year. Based on these projections, the country's sustainable annual economic growth rate: A)is positive. B)is negative. C)depends on the proportions of labor and capital in production.

A is correct Growth in potential GDP = growth in labor force + growth in labor productivity. In this example, -2% + 3% = 1% growth in potential GDP.

A stock priced at $20 has an 80% probability of moving up and a 20% probability of moving down. If it moves up, it increases by a factor of 1.05. If it moves down, it decreases by a factor of 1/1.05. What is the expected stock price after two successive periods? A)$21.24. B)$22.05. C)$20.05.

A is correct If the stock moves up twice, it will be worth $20 × 1.05 × 1.05 = $22.05. The probability of this occurring is 0.80 × 0.80 = 0.64. If the stock moves down twice, it will be worth $20 × (1/1.05) × (1/1.05) = $18.14. The probability of this occurring is 0.20 × 0.20 = 0.04. If the stock moves up once and down once, it will be worth $20 × 1.05 × (1/1.05) = $20.00. This can occur if either the stock goes up then down or down then up. The probability of this occurring is **0.80 × 0.20 + 0.20 × 0.80** = 0.32. Multiplying the potential stock prices by the probability of them occurring provides the expected stock price: ($22.05 × 0.64) + ($18.14 × 0.04) + ($20.00 × 0.32) = $21.24.

**Know for the exam** Intangible assets with finite useful lives are: A)amortized over their expected useful lives. B)amortized over their actual lives. C)not amortized, but are tested for impairment at least annually.

A is correct Intangible assets with finite lives are amortized over their expected useful lives, which is an estimate. Actual lives of intangible assets are often not known in advance. Intangible assets with infinite lives are not amortized, but are tested for impairment at least annually.

Compared to issuing a bond at par value, and holding all else equal, when a company issues a bond at a premium, its effect on the debt/equity ratio will be: A)a decreasing trend in the ratio over the life of the bond. B)no effect on the ratio over the life of the bond. C)an increasing trend in the ratio over the life of the bond.

A is correct Net book value of debt decreases over the life of the bond because the premium amortizes. Stockholders' equity increases over the life of the bond because interest expense decreases each period. This results in a decreasing trend in the debt/equity ratio over the life of the bond, compared to the trend if a bond had been issued at par value.

*know for the exam* The approach to revenue recognition in the converged accounting standards that were issued in May 2014 is best described as: A)principles-based. B)objectives-based. C)rules-based.

A is correct PRINCIPLES BASED

Compared with firms that expense costs, firms that capitalize costs can be expected to report: A)higher asset levels and higher equity levels in the early years of the asset's life. B)lower asset levels and higher equity levels in the early years of the asset's life. C)higher asset levels and lower equity levels in the early years of the asset's life.

A is correct The capitalized cost is recorded as an asset, which is then expensed in the form of depreciation over future years. Spreading the depreciation out over future years causes net income to increase along with retained earnings and equity in the early years of the asset's life.

If stock X's expected return is 30% and its expected standard deviation is 5%, Stock X's expected coefficient of variation is: A)0.167. B)6.0. C)1.20.

A is correct The coefficient of variation is the standard deviation divided by the mean: 5 / 30 = 0.167.

Which of the following is most likely to cause a decrease in the consumption of a good in response to a decline in the price of the good? A)Income effect. B)Law of demand. C)Substitution effect.

A is correct The income effect can be negative if the good is an inferior good. The substitution effect is always positive and will cause consumption of a good to increase if the price declines. The law of demand assumes that a decrease in the price of a good will cause an increase in the quantity demanded.

A is correct The treasury stock method would allow the 1 million additional shares to be partially offset by the number of shares that could be repurchased with the amount of money received for those shares. In this case, the 1 million shares issued would be offset by (1,000,000 × $42 / $56) or 750,000 shares.

Which of the following types of price index is most likely to include a sub-index for raw materials? A)Wholesale price index. B)GDP deflator. C)Consumer price index.

A is correct Wholesale or producer price indexes typically include sub-indexes for finished goods, intermediate goods, and raw materials or crude goods.

Taking an impairment of long-lived assets will result in: A)higher future return on assets. B)a lower debt-to-equity ratio. C)higher deferred tax liabilities.

A is correct in future years, less depreciation expense is recognized on the written-down asset, resulting in higher net income and return on assets since ROA = NI/Total Assets.

Conditions that may cause firms to issue low-quality financial reports are best described as: A)unstable organizational structure and deficient internal controls. B)opportunity, motivation, and rationalization. C)inappropriate ethical standards and failing to correct known reportable conditions.

Stagflation refers to an environment of: A)High unemployment and low inflation. B)High unemployment and high inflation. C)Low unemployment and high inflation.

The binomial probability distribution is an example of a: A.) Continuous probability distribution B.) Discrete probability distribution

which of the follow is least likely to be directly reflected in the returns on a commodity index? A.) roll yield B.) changes in spot prices of underlying commodities C.) changes in the future prices of commodities in the index

Selected information from Doors, Inc.'s financial activities in the year 2005 included the following: Net income was $372,000. 100,000 shares of common stock were outstanding on January 1. The average market price per share was $18 in 2005. Dividends were paid in 2005. 2,000, 6 percent $1,000 par value convertible bonds, which are convertible at a ratio of 25 shares for each bond, were outstanding the entire year. Doors, Inc.'s tax rate is 40%. Doors, Inc.'s diluted earnings per share (Diluted EPS) for 2005 was closest to: A)$3.28. B)$2.96. C)$3.72.

B Doors basic earnings per share (EPS) was ($372,000 / 100,000 =) $3.72. If the bonds were converted, interest payments would not have been made. Net income is increased by the interest paid on the bonds net of taxes: $372,000 + (($1000 × 2,000 × 0.06) × (1 − 0.40)) = $444,000. Diluted EPS was $444,000 / (100,000 + (2,000 × 25)) = $2.96.

According to Keynesian school theory, business cycles are caused by: A)inappropriate variations in the growth of the money supply. B)excessive optimism or pessimism among business managers. C)changes in technology over time.

B In Keynesian business cycle theory, business cycles are caused primarily by changes in expectations about economic growth. Business managers overinvest when they are excessively optimistic and underinvest when they are excessively pessimistic.

**know for the EXAM** Quad Associates, Inc.'s net income for 2005 was $892,000 with 400,000 shares outstanding. The tax rate was 40 percent. Quad had 2,000 six percent $1,000 par value convertible bonds that were issued in 2004. Each bond was convertible into 40 shares of common stock. Quad, Inc.'s diluted earnings per share (Diluted EPS) for 2005 was closest to: A)$2.41. B)$2.01. C)$2.23.

B Quad's basic EPS (net income / weighted average common shares outstanding) was $892,000 / 400,000 = $2.23. Diluted EPS is calculated under the assumption that the convertible bonds are converted into common stock, the bond interest net of tax is restored to net income, and the additional common shares are added to the denominator of the equation. Quad's diluted EPS was [$892,000 + (2,000 × $1,000 × 0.06)(1 − 0.40)] / [400,000 + (2,000 × 40)] = $2.01. Since diluted EPS is less than basic EPS, we know that the bonds are dilutive and should be considered in calculating diluted EPS.

The short-run supply curve to a firm operating under perfect competition is most accurately described as the segment of the: A)marginal cost (MC) curve below the average total cost (ATC) curve. B)marginal cost (MC) curve above the average variable cost (AVC) curve. C)average total cost (ATC) curve above the average variable cost (AVC) curve.

B The short-run supply curve for a firm under perfect competition is the segment of its MC curve above the AVC curve.

The spot exchange rate for CHF/EUR is 0.8342 and the 1-year forward quotation is −0.353%. The 1-year forward exchange rate for EUR/CHF is closest to: A)1.2022. B)1.2029. C)0.8313.

B The forward rate for CHF/EUR is 0.8342 × (1 − 0.00353) = 0.8313. The 1-year forward EUR/CHF exchange rate is 1 / 0.8313 = 1.2030.

**disregard until know if it is a surplus or deficit** In a country that has a current account surplus, it is most likely that: A)private domestic savings are greater than the budget deficit. B)total domestic savings are greater than domestic investment. C)domestic investment is greater than domestic government savings.

B is correct

An empirical probability is one that is: A)determined by mathematical principles. B)derived from analyzing past data. C)supported by formal reasoning.

B is correct

First in, first out (FIFO) inventory equals: A)change in LIFO reserve − ending LIFO reserve. B)LIFO inventory + LIFO reserve. C)LIFO cost of goods sold − change in LIFO reserve.

B is correct

Under U.S. GAAP, interest paid would be classified as: A)financing cash flow. B)operating cash flow. C)having no cash flow impact.

B is correct

According to the IFRS framework, timeliness is a characteristic that enhances: A)only relevance. B)both relevance and faithful representation. C)only faithful representation.

B is correct In the IFRS framework, timeliness, comparability, verifiability, and understandability are characteristics that enhance the two fundamental qualitative characteristics, relevance and faithful representation. Information that is not timely will not be relevant or faithfully represent the activities of a firm over the reporting period.

The market structure in which a firm's optimal pricing strategy depends on the responses of other firms is: A)Monopolistic competition. B)Oligopoly. C)Perfect competition.

B is correct Interdependence of firms is a characteristic of an oligopoly market. Optimal pricing for a firm in an oligopoly market depends on expectations of how its competitors will respond.

Firms in a perfectly competitive industry will increase their output until which of the following conditions is met? A)Total revenue equals price. B)Marginal cost equals price. C)Marginal revenue equals average total cost.

B is correct When a firm operates under conditions of perfect competition, marginal revenue always equals price. Under perfect competition, price is constant (a horizontal line) so marginal revenue is constant. Therefore a firm will increase output until marginal cost equals price.

A reduction in short-run aggregate supply is most likely to be accompanied by an increase in: A)real GDP. B)the price level. C)real interest rates.

B is correct A decrease (shift to the left) in short-run aggregate supply results in lower output and a higher price level. A decrease in short-run aggregate supply will likely cause nominal and real interest rates to decrease.

A portfolio's monthly returns follow a distribution with a kurtosis measure of 4.2. Relative to a portfolio with normally distributed returns, this portfolio has a: A)lower chance of extreme upside returns and higher chance of extreme downside returns. B)higher chance of extreme upside returns and higher chance of extreme downside returns. C)higher chance of extreme upside returns and lower chance of extreme downside returns.

B is correct A leptokurtic distribution (a distribution with kurtosis measure greater than 3) is more peaked in the middle (data more clustered around the mean) and has fatter tails at the extremes (greater chance of outliers).

A firm's most likely initial response to a cyclical increase in the inventory-to-sales ratio is to adjust their utilization of labor by: A)laying off employees. B)reducing overtime. C)adding new workers.

B is correct As a cyclical indicator, an increase in the inventory-to-sales ratio is a sign of slowing economic growth. When decreasing their utilization of labor in response to a slowing economy, firms typically first reduce overtime. Firms tend to be slow to lay off workers until it is clear that an economic contraction is underway.

if the tax expense is greater than the tax payable then a ________________ should be recorded? A.) Deferred Tax Asset B.) Deferred Tax Liability

B is correct DFL = Tax Expense > Tax Payable

Assuming the economy currently is experiencing high inflation, an example of appropriate discretionary fiscal policy is: A)reduce the money supply. B)reduce government expenditures on major government construction projects. C)increase the federal funds target rate.

B is correct Discretionary fiscal policy refers to the federal government's decisions regarding government spending and taxing. A reduction in government spending on major government construction projects is likely to lead to a reduction in aggregate demand and less pressure on prices, reducing inflation.

Which of the following fiscal and monetary policy scenarios is most likely to increase the size of the public sector relative to the private sector? A)Contractionary fiscal and monetary policy. B)Expansionary fiscal policy and contractionary monetary policy. C)Expansionary monetary policy and contractionary fiscal policy.

B is correct Expansionary fiscal policy tends to expand the public sector. Contractionary monetary policy tends to contract the private sector.

Given P(X = 2) = 0.3, P(X = 3) = 0.4, P(X = 4) = 0.3. What is the variance of X? A)0.3. B)0.6. C)3.0.

B is correct Explanation The variance is the sum of the squared deviations from the expected value weighted by the probability of each outcome. The expected value is E(X) = 0.3 × 2 + 0.4 × 3 + 0.3 × 4 = 3. The variance is 0.3 × (2 - 3)^2 + 0.4 × (3 - 3)^2 + 0.3 × (4 - 3)^2 = 0.6.

**KNOW FOR THE EXAM** Which of the following circumstances is most likely indicative of an increase in a company's future earnings? A)Finished goods inventory increasing faster than sales. B)Work-in-process inventory increasing faster than finished goods inventory. C)Finished goods inventory increasing faster than work-in-process inventory.

B is correct Finished goods inventory increasing faster than sales or work-in-process inventory may indicate that demand is decreasing. Analysts should refer to sources such as management's commentary to further examine the reasons for an increase in finished goods inventory.

LIFO ending inventory can be adjusted to a FIFO basis by: A)adding the change in the LIFO reserve. B)adding the LIFO reserve. C)subtracting the change in the LIFO reserve.

B is correct LIFO ending inventory can be adjusted to a FIFO basis by adding the LIFO reserve, which a firm using LIFO must disclose in the notes to its financial statements.

B is correct Since there are twice as many male employees to female employees, P(male) = 2/3 and P(female) = 1/3. Therefore, the probability of 4 "successes" = (0.333)^4 = 0.0123.

The use of the F-distributed test statistic, F = s12 / s22, to compare the variances of two populations does NOT require which of the following? A)populations are normally distributed. B)two samples are of the same size. C)samples are independent of one another.

B is correct The F-statistic can be computed using samples of different sizes. That is, n1 need not be equal to n2.

The cross price elasticity of demand for a substitute good and the income elasticity for an *inferior good* are: Cross elasticity ---- Income elasticity A.) Negative -- Positive B.) Positive -- Negative C.) Negative -- Negative

B is correct The cross price elasticity of substitutes is positive, and the income elasticity of an inferior good is negative.

*KNOW FOR THE EXAM * When household incomes go down and the quantity of a product demanded goes up, the product is: A)a Veblen good. B)an inferior good. C)a normal good.

B is correct When household incomes go down and the quantity demanded of a product goes up, the product is an inferior good. Inferior goods include things like bus travel and butter.

when computing CF's for a capital project which of the following is *least likely* to be included? A.) Tax effects B.) Financing costs C.) Opportunity costs

B is correct financing costs are not included in a CF calculation but are considered in the calculation of a discount rate

financial risk is most likely affected by? A.) dividends B.) L/T leases C.) general and admin costs

B is correct fixed obligations such as debt or long term leases, the company increases its financial risk

Compared to a competitive market, a monopoly situation will produce: A)less output, and the sum of the consumer surplus and the producer surplus will be increased. B)more output, and the sum of the consumer surplus and the producer surplus will be reduced. C)less output, and the sum of the consumer surplus and the producer surplus will be reduced.

Characteristics of an oligopoly least likely include: A)interdependence among competitors. B)significant barriers to entry. C)identical products.

C In an oligopoly, a small number of producers sell products that can be similar or differentiated. An oligopoly typically features significant barriers to entry including economies of scale.

A hypothesis test has a p-value of 1.96%. An analyst should reject the null hypothesis at a significance level of: A)4%, but not at a significance level of 2%. B)6%, but not at a significance level of 4%. C)3%, but not at a significance level of 1%.

C The p-value of 1.96% is the smallest level of significance at which the hypothesis can be rejected.

Which of the following statements is most accurate regarding monetarists? Monetarists believe that: A)fiscal policy is the most powerful of all government tools used to affect prices and output. B)discretionary monetary policy is the best way to moderate fluctuations in prices and output. C)steady, predictable money growth is the best monetary policy.

C is correct Monetarists believe that the Fed's tools are powerful and SHOULD NOT be used to moderate fluctuations in prices and outputs

The percent change in demand for a good divided by the percent change in the price of another good is known as the: A)price elasticity of demand. B)income elasticity of demand. C)cross price elasticity of demand.

C is correct

Which of the following statements about probability distributions is most accurate? A)A continuous uniform distribution has a lower limit but no upper limit. B)A discrete uniform random variable has varying probabilities for each outcome that total to one. C)A binomial distribution counts the number of successes that occur in a fixed number of independent trials that have mutually exclusive (i.e. yes or no) outcomes.

C is correct Binomial probability distributions give the result of a single outcome and are used to study discrete random variables where you want to know the probability that an exact event will happen. A continuous uniform distribution has both an upper and a lower limit. A discrete uniform random variable has equal probabilities for each outcome.

a trader who buys a stock priced at $64 on margin with a leverage ratio of 2.5 and a maintenance margin of 30% will most likely receive a margin call when the stock price is at or falls just below A.) $36.57 B.) $44.80 C.) $54.86

C is correct Debt balance/ 1 - maintenance margin % = 64 *0.6 / 1- 0.3 Equity = 1/leverage ratio = 1/2.5 = 0.4 1-0.4 = 0.6*

McKay Company uses a periodic inventory system and the FIFO inventory cost method. In the most recent period, McKay had beginning inventory of $4,200, purchases of $1,400, cost of sales $1,300, and ending inventory of $4,300. If McKay had used a perpetual inventory system, its ending inventory would have been: A)$4,400. B)$4,200. C)$4,300.

C is correct For a firm that uses the FIFO inventory cost method, cost of sales and ending inventory are unaffected by the choice between periodic and perpetual inventory systems.

A good for which consumers exhibit a negative income effect that is smaller than the substitution effect is most accurately described as a(n): A)Veblen good. B)Giffen good. C)inferior good.

Which type of unemployment describes situations where qualified workers are not immediately matched with existing job openings? A)Cyclical. B)Structural. C)Frictional.

C is correct Frictional unemployment will prevent qualified workers from being immediately matched with existing job openings. Two causes are imperfect information and the job search conducted by both employers and employees.

In the Heckscher-Ohlin model, whether a country has a comparative advantage relative to another country is determined by: A)labor productivity differences. B)capital productivity differences. C)amounts of labor and capital the countries possess.

C is correct In the Heckscher-Ohlin model a country that has relatively more capital will export capital-intensive goods and import labor-intensive goods, while a country that has relatively more labor will export labor-intensive goods and import capital-intensive goods.

The LM curve is drawn holding which of the following factors constant? A)Real interest rate. B)Real GDP. C)Real money supply.

C is correct The LM curve illustrates the relationship between real income and the real interest rate, for a given level of the real money supply.

A firm's financial statements reflect the following: Net income = $1,700,000 EBIT = $2,900,000 Effective tax rate = 35% Interest payments = $285,000 Common equity = $3,100,000 Total assets = $6,600,000 Preferred dividends paid = $1,100,000 Weighted avg. shares outstanding = 523,000 Based on this information, what is the firm's basic EPS? A)$3.25. B)$2.75. C)$1.15.

C is correct The firm's basic EPS = ($1,700,000 - $1,100,000) / (523,000) = $1.147.

to estimate the justified forward P/E ratio, the investor prefers the compounded annual earnings growth and the average payout ratios over the reverent period (2008-2011). If the investor uses 11.5% as her required rate of return, the stocks justified forward P/E is? A.) 10 B.) 12 C.) 21

C is correct earning growth or 2008-2011 = 2.5(1+G)^3 = 3.2 G = 8.6% payout ratio computation --> 1.92/3.2 - 0.6 average payout = (0.6+0.50+0.70+0.64)/ 4 = 0.61 Po/E1 = Payout ratio /Required rte -Growth rate 0.61 / 0.115 - 0.086 = 21

A stop buy order is most likely placed when a trader A.) thinks that the stock is overvalued B.) wants to limit the loss on a long position C.) wants to limit the loss on a short position

C is correct investors who have entered a short sale will incur losses if the stock begins to increase in value. a stop buy order helps limit the loss on a short portion because it becomes valid when the stock price is above a specified stop price

a trader who bought a stock for $30 is concerned about the downside movement in the stock and would like to place order that guarantees it at $25. Which of the following will most likely help the trader achieve her objective. (GTC = Good to cancel) A.) GTC, stop 25, market sell order B.) GTC, stop 25, limit 25 sell order C.) put option buy market order with a strike price of 25

C is correct option contracts can be viewed as limit orders for which execution is guaranteed at the strike price. therefore a put buy order at the strike price of 25 will guarantee selling the stock at 25.

The upward sloping segment of a long-run average total cost curve represents the existence of: A)efficiencies of scale. B)diseconomies of scale. C)economies of scale.

Diseconomies of scale occur along the upward sloping segment of the long-run average total cost curve where costs rise as output increases. The flat portion at the bottom of the long-run average total costs curve represents constant returns to scale.

A stock priced at $100 has a 70% probability of moving up and a 30% probability of moving down. If it moves up, it increases by a factor of 1.02. If it moves down, it decreases by a factor of 1/1.02. What is the probability that the stock will be $100 after two successive periods? A)21%. B)9%. C)42%.

For the stock to be $100 after two periods, it must move up once and move down once: $100 × 1.02 × (1/1.02) = $100. This can happen in one of two ways: 1) the stock moves up during period one and down during period two; or 2) the stock moves down during period one and up during period two. The probability of either event is 0.70 × 0.30 = 0.21. The combined probability of either event is 2(0.21) = 0.42 or 42%.

Compared to GDP calculated using the sum-of-value-added method, GDP using the value-of-final-output method will be: A)biased downward. B)equal to it. C)biased upward.

GDP calculated under the two methods is the same. B

Accelerated depreciation methods for financial reporting are most likely to have which of the following effects on a company's financial ratios during the early years of an asset's life? A)Lower current ratio. B)Lower debt-to-equity ratio. C)Higher asset turnover ratio.

Given the higher depreciation expense recorded in the early years under accelerated depreciation methods, total assets will be lower, causing a higher asset turnover ratio versus straight-line.

Money supply/Money multiplier has a (Direct/Inverse) Relationship with the federal funds rate?

Inverse

what is the formula for net profit margin?

Net income / Net Sales

what is the formula for coefficient of variation?

St. Dev/ Mean

Monthly sales of hot water heaters are approximately normally distributed with a mean of 21 and a standard deviation of 5. What is the probabilility of selling 12 hot water heaters or less next month. Calculate the the Z value...

Z = (12 - 21) / 5 = -1.8

the company has a equity beta of 1.4 and is 60% funded with debt. Assuming the Tax rate is 35% the company asset beta is closest to? A.) 0.71 B.) 0.98 C.) 1.01

The answer is A D/E = 0.6/(1-0.6) = 1.5 Asset Beta = Equity Beta / (1/(1 + (D/E * (1-Tc)) = 1.4/(1 + 1.5 *(1-.035)) = 0.7089

The test statistic = (sample mean - hypothesized mean) / (sample standard deviation / (sample size^1/2)) = (X − µ) / (s / n1/2) = (65,000 - 62,500) / (2,600 / 125^1/2) = (2,500) / (2,600 / 11.18) = 10.75.

*know for the exam* A company that reports under *IFRS* has developed a new product which required research costs of $2 million and development costs of $3 million. The maximum amount the company can record as the value of the new product on its balance sheet is: A)zero. B)$5 million. C)$3 million.

Under IFRS, research costs must be expensed but development costs, under certain circumstances, may be capitalized.

using a two stage dividend discount mode, the value per share of this common stock in 2012 is closest to? A.) $28.57 B.) $31.57 C.) $38.70 EPS (2012) --> $1.50 Dividend payout (2012) --> 60% Dividend growth exp. during 2013- 2014 --> 25% dividend growth exp. after 2014 --> 5% investors required rate of return --> 12%

Value = 1.50 (1.25)/1.12 + 1.50(1.25)^2/1.12^2 + {1.50(1.25^2)(1.05) / 0.12-0.05)} / 1.12^2 = 1.67 + 1.87 +28.03 = 31.57 B is correct

using the following income statement presented, what is the degree of operating leverage closest to? A.) 1.1 B.) 1.7 C.) 2.4 Revenue --> $9.8 Variable Operating Costs --> $7.2 Fixed Operating Costs --> $1.5 -------------------------- Operating income --> $1.1 Interest --> 0.6 ------------------------- Taxable Income --> $0.5 Tax --> $0.2 ------------------------- Net income --> 0.3

degree of operating leverage = (rev - var. op. costs/ rev - var op. costs - fixed op. costs = 9.8 - 7.2 / 9.8 -7.2 -1.5 = 2.36 C is correct

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