CFA final exam
Which of the following parties are least likely to be affected by the Global Investment Performance Standards (GIPS®)?
Regulatory authorities
The provisions for each section of the Global Investment Performance Standards (GIPS) are divided between:
Requirements and recommendations.
Which of the following statements are valid? Statement 1: Data were gathered on the movement of dividend policies of stocks comprising the S&P 500 from 1970 to 2013. During this time frame, there were 19,370 instances of chances of dividend either up or down with 3,680 instances of a down movement. This equates to 19% probability of a down movement. This illustrates an empirical probability. Statement 2: When one uses his personal judgment to create probabilities, a subjective probability is created. On the other hand, priori and empirical probabilities are nonsubjective methods of creating probabilities.
Statements 1 and 2 are valid.
Which of the following is the most appropriate classification of profit on sale of discontinued operations by a manufacturing firm?
Gain reported after continuing operations
For an investor concerned with the terminal value of a security, which of the following is the most appropriate measure of the central tendency of a time series of returns?
Geometric mean.
Under the Elliott Wave Theory, the longest of the waves is called the:
Grand supercycle.
All of the following statements are disadvantages of comparable valuation using price multiples, except:
NOT "Price multiples may not be comparable across firms if the firms have different size, products, and growth."
Which of the following is not the goal of the GIPS Executive Committee?
NOT "To promote the use of accurate and consistent investment performance data."
Given the following information: Mean: 15% SD: 18% What is a 95% confidence interval for next year's return?
NOT "−3.00% to 33.00%"
Which of the following is least likely a consideration when defining asset classes?
The correlation among assets within a class should be relatively low.
Shares that are currently owned by common shareholders are most likely referred to as:
Outstanding shares.
Which of the following ratios are correctly described as liquidity and solvency ratios? LiquiditySolvencyA.CashCurrentB.CurrentDebt to equityC.Debt to equityFinancial leverage
Row B
Steve Michael, CFA is having lunch with one of his friends at a local restaurant and overhears someone talking about a pending merger for Pharmotech stock. Michael walks over to this person because he follows this stock as well and knows nothing of a merger, only to find out it is the company's CEO making these statements. Which of the following Standards of Professional Conduct applies to this situation?
Standard II(A)
With regard to verification, it is least accurate to state that verification:
is performed by a firm's internal control system.
Javad estimated a market model for IBM using excess returns and determined that the alpha was statistically significant. Then Javad could most likely conclude that IBM:
is undervalued.
In a best‐efforts offering, the risk that the entire issue is not sold to the public at the stipulated offering price is borne by the:
issuer.
An assumption of the capital asset pricing model (CAPM) is:
Infinitely divisible assets.
Dianna Pennyworth purchased a car for $22,000 on zero down payment. The purchase was facilitated by a five‐year fixed‐rate auto loan with quarterly payments. The first payment is due at the end of this quarter. The quoted interest rate is 5%, compounded quarterly. Dianna's quarterly loan payments will be closest to:
$1,250.
Anna Jeremiah owns a perpetuity that entitles her to receive $500 every year. She also issues a perpetuity obligating her to pay $500 every year. However, the first payment of the issued perpetuity is at t = 4. What is the net present value of the perpetuities assuming an interest rate of 5%?
$1,361.62.
A deposit of $1 million earns a return of 5% compounded continuously for 8 years. The future value is closest to:
$1,492,000.
Arnold Jones, CFA, compiled the following information on Jamit Enterprises for the year ended 31 December 2012. He noted Jamit's tax rate was 28 percent and they paid cash dividends of $6 million in 2012. Revenue$4,000,000Cost of goods sold1,280,000Other operating expenses1,040,000Interest expenses320,000Other comprehensive income110,000 Jones calculated an operating profit for Jamit for 2012 of:
$1,680,000
During 2009, Solar Corporations earned profits amounting to $4.5 million and paid preference dividends amounting to $100,000. The company had 3.5 million shares outstanding throughout the year with an average market price of $50. It also had 50,000 stock options outstanding, which had an exercise price of $40. Given that the market price of the company's shares at year‐end was $60 and that the company pays taxes at the rate of 35%, its diluted EPS using the treasury stock method is closest to:
$1.254
A company incurs the following costs on a particular project: Year200620072008TotalCosts incurred ($ '000)5007003001,500 The total revenue from the project is expected to be $2,000,000. Under the percentage-of-completion method, the project's net income in 2008 is closest to:
$100,000
Solitaire Inc. prepares its financial statements according to U.S. GAAP. During 2009, the company earned net income amounting to $102 million. During the year, it purchased machinery worth $22 million and recognized a total depreciation expense of $2.4 million. The company also paid an annual dividend amounting to $1.5 million. Based on this information, the company's cash flow from operations is closest to:
$104.4 million.
A company had 2 million common shares outstanding throughout the last year. Total dividends of $1 million were paid to common stockholders and dividends of $400,000 were paid to preferred stockholders. Net income was $6 million and the tax rate was 40%. The company also had 100,000 options on common stock outstanding throughout the period; the exercise price is $20.00. The average share price over the year was $27.00 and the end year price was $35.00. The diluted earnings per share was closest to:
$2.76.
After seeing the new Ferrari F50, Mark decided to get an auto loan amounting to $384,000. It was a very affordable loan with a 20‐year term at a 6.5% interest rate. If Mark decides to make monthly payments starting next month, how much is the principal component of the first three years of payment?
$31,031.75
Mrs. Doherty wants to gift a car worth $24,000 to her son for his 18th birthday. She has 40% of the funds, and borrows the rest for 4 years at 8% compounded monthly. The fixed monthly payment that she will have to make to retire the loan in 48 months is closest to:
$352
Magma Industries Ltd. reported a net profit of $104 million for 2009, with revenues of $500 million and COGS of $270 million. During the period, Magma made purchases worth $40 million. If the company's accounts payable increased by $4 million, cash paid to the company's suppliers was closest to:
$36 million.
Extracts from the financial statements of Phoenix Supply Corporation (in millions) are as follows: 201420132012Net income$2,410$2,650Interest expense250275Tax expense810880Net cash provided by operating activities2,5002,750Total cash inflow for investing activities750450Total cash outflow for investing activities1,100650Total cash inflow for financing activities600660Total cash outflow for financing activities800870Accounts payable (year‐end balances)2,2002,110$2,150Interest payable (year‐end balances)757979Tax payable (year‐end balances)525552 Cash outflow and inflow for investing activities occurred for the sale and the purchase of equipment. Cash outflow for financing activities includes retirement of common stock of $200 million for 2014 and $220 million for 2013 and the retirement of long‐term debt of $400 million for 2014 and $450 million for 2013. All cash inflows for financing activities are from the issuance of additional stock. From 2013 to 2014, assuming a tax rate of 30%, Phoenix Supply's free cash flow to the firm decreased by:
$415.
John and Paula Smith are expecting a baby girl. They've decided to set up a college fund, contributing $100 per month for the next 18 years. If they can achieve an average return of seven percent on the account, the expected future value is closest to:
$43,000
Runway, a fashion clothing company, reported annual revenue of $500 million, total expenses of $100 million, and net income of $20 million. If accounts receivable decreased by $25 million, how much cash did the company receive from its customers?
$525 million
Bounty Gold Miners Inc.'s futures contract specifies the delivery of 1,000 troy ounces of gold. Anna Antony bought ten contracts at $1,180 per troy ounce through a broker. The initial overnight margin is $121,540 per contract and the maintenance margin is $88,500. The contract is settled for $1,120 per troy ounce the next day. Anna will have to provide an additional margin of:
$600,000.
A preferred stock has a 6.25 percent dividend yield and $100 par value. This preferred stock is perpetual, nonconvertible, and noncallable. The required rate of return on similar issues is 7.50 percent. The intrinsic value of each preferred share is closest to:
$83.00
North Company uses U.S. GAAP and provides the following financial statements: 2016 Income Statement (in $ thousand)Sales5,400COGS(4,600)Depreciation(200)Interest expense(55)Gain on sale of old machinery30Income before taxes575Income tax expense(175)Net income after taxes400 Balance sheet (in $ thousand)End 2016Beg 2016Assets:Cash895100Accounts receivable260200Inventory500800Property, plant & equipment net of acc. depreciation300500Total assets1,9551,600Liabilities:Accounts payable370350Bank notes0100Deferred taxes9040Common stock1,0001,000Retained earnings495110Total liabilities1,9551,600 Total dividends of $15,000 were paid. Old machinery was sold; the machinery had already been fully depreciated. The cash flow from operations in 2016 is:
$880,000.
The balance sheet amounts of assets, net of liabilities, is most likely viewed as a measure of the:
Book value of a company's equity.
Net income = $880,000 Cost of goods sold = $600,000 Depreciation expense = $49,000 Interest expense = $27,000 Investment in fixed assets = $32,000 Investment in working capital = $13,000 Funds borrowed = $16,000 Debt repaid = $10,000 Marginal tax rate = 40% Free cash flow to the firm is closest to:
$900,200
Joe is in charge of a very large equity management firm that does a significant amount of trading with soft‐dollar commissions. At the end of the year, what percent of the soft‐dollar commissions is he allowed to pay out in annual bonuses to his employees?
0%
Use this data from Ytterby Energies Corp. to determine the project's beta in Japan: Expected market return15%Risk‐free rate5.4%Country risk premium3.35%Cost of equity for the project16.27 What is the project beta?
0.84
Frog Company had a net income of $1,000,000 for 2010. It received dividends from available‐for‐sales securities for $60,000, paid cash dividends for $110,000, and reacquired common stock for $400,000. It also realized a gain on the sale of equipment for $65,000. Finally, it recorded unrealized loss from foreign currency translation for $15,000, unrealized loss from available‐for‐sale securities for $10,000, and unrealized gain from cash flow hedge for $30,000. What is the total comprehensive income?
1,005,000
An analyst is using a sample of 15 P/Es to estimate the average P/E for the S&P 500 Index. The sample mean is 16.0 and its variance is 20.0. If the population mean and standard deviation are unknown, then the standard error of the sample mean is closest to:
1.15
Last year, a company issued $50 million of debt that was entirely bought by a private investor. This debt, which was issued at par and is not traded, has a nine‐year remaining life and pays 8.0 percent interest on a semiannual basis. If the company were to issue $10 million in new debt today at par value, it would have to pay a coupon of 12.0 percent. The company's equity has an estimated market value of $5 million and the estimated cost of equity capital is 20 percent. The company has no additional debt or equity outstanding and is currently, and for the foreseeable future, paying no taxes due to past and expected future losses. In determining the company's weighted average cost of capital, the appropriate after‐tax cost of debt is closest to:
12.0 percent.
The following table was excerpted from a company's financial reports. Millions £Statement of comprehensive incomeTotal revenue100,000Interest expense10,000Income taxes8,000Net income35,000Statement of changes in stockholders' equityCommon equity, beginning balance190,000Issuance of preferred stock1,000Dividends to preferred shares5,000Dividends to common shares10,000Balance sheetTotal assets at end of period2,300,000Total liabilities at end of period2,050,000Ending preferred stock40,000 Based on this information, the company's return on common equity is closest to:
15%
The following financial statements relate to Magma Corporation: INCOME STATEMENT: 2008 ($ '000)2009 ($ '000)Total revenue242,500367,700Cost of goods sold(112,300)(197,500)Gross profit130,200170,200Depreciation(12,900)(16,800)Salaries and wages(7,700)(8,100)Electricity(11,100)(13,500)Administrative expenses(13,200)(16,300)Marketing(17,200)(22,200)Operating lease payments(14,000)(17,100)Operating income54,10076,200Interest income2,9003,100Interest expense(2,100)(2,400)Income before taxes54,90076,900Provision for income taxes(24,000)(23,000)Net income30,90053,900 BALANCE SHEET: 2008 ($ '000)2009 ($ '000)AssetsLong‐term AssetsProperty, plant, and equipment105,700153,700Investment in associates68,60080,600Goodwill47,10054,100Other long‐term assets38,50044,500Total Long‐term Assets259,900332,900Current AssetsInventory4,9006,200Accounts receivable5,3007,500Short‐term marketable securities6,2008,300Prepaid expenses4,7004,500Cash5,5005,100Total Current Assets26,60031,600Total Assets286,500364,500Shareholders' Equity and LiabilitiesShareholders' EquityCommon stock100,000100,00010% Preferred stock75,00075,000Retained earnings31,00042,500Total Shareholders' Equity206,000217,500LiabilitiesLong‐term debt72,000134,700Current LiabilitiesAccounts payable4,7006,700Accrued expenses3,8005,600Total Current Liabilities8,50012,300Total Shareholders' Equity and Liabilities286,500364,500 Using the above information and assuming a tax rate of 40%, answer the following question Magma Corporation's return on assets for 2009 is closest to:
16.56%
Which of the following ratios is least affected by the purchase of Treasury stocks?
Interest coverage ratio.
Among the following three coefficients of risk aversion, which one represents the most amount of risk aversion?
2
As a member of the forensics team in a murder case, you found a DNA sample which is that of the murderer's and there is a 0.2% chance that a random person's DNA matches this sample. In your search, one of the alleged suspects' DNA matches with the sample you have obtained. You know that there is only a .004% chance that a random person is the actual murderer but there's a 100% chance that the man's DNA matches that of the murderer's given that the man is indeed the one who killed the victim. What are the chances that the man is proven guilty given that his DNA matches your sample?
2%
An analyst issues buy, hold, and sell recommendations on the 12 stocks that he follows. If his opinion on the overall direction of the market is neutral, he expects the stocks to be assigned with two buys, eight holds, and two sells. How many ways can the 12 stocks be assigned the three labels assuming he has a neutral outlook for the market?
2,970 ways.
For a sample size of 15, the reliability factor based on the t‐distribution (see table below) to be used in a 99 percent confidence interval is closest to: Student's t‐Distribution (One‐Tailed Probabilities)Dfp = 0.10p = 0.05p = 0.025p = 0.01p = 0.005141.3451.7612.1452.6242.977151.3411.7532.1312.6022.947161.3371.7462.1202.5832.921171.3331.7402.1102.5672.898181.3301.7342.1012.5522.878
2.977
AM Industries (AMI) is based in a country that taxes the first $1 million of corporate pretax profits at 10 percent and any corporate pretax profits above $1 million are taxed at 30 percent. AMI earned pretax profits of $2 million last year and expects to earn pretax profits of $3 million in the current year. In calculating the company's weighted average cost of capital (WACC), the tax rate an analyst will use to find the after‐tax debt cost is closest to:
30
Information for the equipment purchase of Eshy25 Company for 20X6 is as follows: Date of purchaseJanuary 1Purchase of machine$5,000,000Useful life5 years It is Eshy's policy to use double‐declining balance for the first two years of the asset's life and switch to straight‐line depreciation from the third year onward. How much is the accumulated depreciation for the December 31, 20X8 balance sheet?
3,800,000
An analyst is preparing an absolute frequency distribution of mutual fund 5‐year average returns. The data are arrayed in the following table: FundReturnFundReturnA−1.0%F7.5%B−0.5%G8.3%C1.2%H9.5%D5.0%I10.0%E5.5%J12.5% If the analyst wants to group the data into four intervals, the appropriate interval width is closest to:
3.38 percent.
An analyst has completed a random sample of sell‐side analyst recommendations and calculates the excess return (alpha) relative to the market for each sampled recommendation. The sample size was 120, and the average alpha was 45 basis points (also referred to as 45 bps, 0.45%, or 0.0045). The sample had a standard deviation of 60 basis points. Based on a normal distribution for the alphas for sell‐side analyst recommendations, a 95% confidence interval for the population mean of all sell‐side analyst recommendations is closest to:
34 to 56 basis points
The probability of a company meeting or exceeding analysts' earnings forecasts for companies whose stocks have been listed for less than three years is 80% and of failing to meet forecasts is 20%. For stocks that have been listed for more than 3 years the rates are 95% and 5%, respectively. Fifteen percent of stocks in a market have been listed for less than 3 years. If a stock fails to meet analysts' earnings forecasts, what is the probability that the stock has been listed for less than 3 years?
41.40%.
Rising Stars Limited (RSL) reported revenue of $3,120,000 and net income of $546,000 for the fiscal year end 30 June 2012. At 1 June 2011, RSL had 465,000 common shares outstanding and 60,000 common stock options outstanding with an exercise price of $14 each. During that fiscal year, the average market price for RSL's shares was $24 per share. RSL had no other potentially dilutive securities. What amount of shares would be used for the weighted average number of common stock in the calculation of diluted EPS for the 2012 fiscal year?
490,000
An analyst collected the following information: Inflation premium2%Default risk premium2%Liquidity premium1%Maturity premium2% Assuming the required rate of return is 10%, the nominal risk‐free interest rate is closest to:
5%
An investor gathered the following information regarding three stocks, which are not in the market portfolio: StockActual ReturnStandard DeviationBetaA22%25%1.1B17%30%1.4C19%23%0.8 The return on the market portfolio is 15% with a standard deviation of 21%, and the risk‐free rate of return is 4%. Stock C's Jensen's alpha is closest to:
6.20%
A positive economic performance for the succeeding year has a 90% chance of happening and a 10% chance if it's otherwise. If it's the first, ABC Co. will have a 70% chance of obtaining an EPS of $8.00 and 30% chance of getting a $4.00 EPS. If the economy turns out to have a negative performance for the succeeding year, then ABC Co. has an 85% chance of getting an EPS of $1.50 and 15% chance of obtaining $2.00. How much EPS is expected out of the given situation?
6.28
A mortgage‐backed security pays interest monthly. The effective annual interest rate (EAR) is 6.50 percent. The stated annual interest rate (APR) is closest to:
6.31 percent.
Randa Muhtaseb intends to borrow $5,000,000 for one month, and is evaluating the cost of a line of credit at 6.0% with a 0.25% commitment fee on the full amount with a 10% compensating balance. The effective cost of credit is:
6.94%
Creole Inc. opened its business in January 2016. To kick off its operations, the company ordered and purchased raw materials from its local suppliers Php 1,200,000 with terms 4/10, n/40. What is the annualized cost of not taking the discount and just paying the invoice at its due date?
64%
An analyst is collecting data on mutual fund performance. He estimates that the standard deviation of funds' returns is 4% and returns are independent across funds. To achieve a standard error of sample mean of 0.5% how many funds does he need to include in his sample?
64.
Julianne Industries recently introduced a new detergent product to cater to lower-income households. During its pilot year, Julianne sold 575,000 detergent bottles at a retail price of Php 9.00 per unit and incurred Php 4,312,500 variable costs. Fixed operating costs were P990,000, whereas fixed financing costs were Php 412,500. What is the operating breakeven quantity of sales for Julianne's new product line?
660,000 units
Islington Corporation provides you with the following information: Income Statement ($ million)Balance SheetAverage over Period$ millionSales on credit298Cash50Accounts payable80COGS(200)Accounts receivable60Accrued expenses65Gross profit98Inventory100Long‐term debt150SGA expenses(60)Property, P&E375Op. profit38Depreciation(85)Common stock140Interest expense(6)Retained earnings65Tax(13)Net Income19Total Assets500Total Liabilities & Equity500 The average receivables collection period for Islington Corporation is closest to:
73.5 days
A data distribution of the L&H 100 Index shows arithmetic mean growth of 3.06% with standard deviation of 9.27%. Using Chebyshev's inequality, the proportion of observations falling within 2 standard deviations is closest to:
75%
The current debt‐to‐equity ratio of Crimson Corporation is 2.5. The company has failed to give a comprehensive estimate of its target capital structure. The other financial details of the company are as follows: Book value of debt$250,000Book value of equity$100,000Market value of debt$350,000Market value of equity$400,000Current yield of debt6%Yield to maturity of debt7.50%Effective tax rate30%Marginal tax rate35%Equity risk premium4.50% The risk premium for bearing additional risk associated with the company's stock compared to that of bonds is 3.5%. The company's weighted average cost of capital (WACC) is closest to:
8.14%
An investor holds two index mutual funds in his retirement account, a stock fund and a bond fund. The expected annual return on equities over the investment period is 9.0 percent. The expected return for bonds over the same period is 5.2 percent. What is the expected return on a portfolio invested 80 percent in the stock fund and 20 percent in the bond fund?
8.24 percent.
Aaron Thomas makes an investment of $25,000 on January 1, 2010. The investment appreciates to $32,500 by the end of 2012, compounding continuously. Calculate the annual continuously compounding rate.
8.75%
The portfolio manager for a domestic‐only mutual fund collected the following data for asset classes in his eligible investment universe. Descriptive StatisticsCorrelation MatrixAsset ClassExpected ReturnStandard DeviationEquitiesFixed IncomeEquities9.0%12.0%1.000.50Fixed Income6.0%7.0%1.00 The standard deviation of a portfolio consisting of 60% equities and 40% fixed income is closest to:
8.9%.
South Corp.'s target capital structure is 50% debt, 10% preferred stock, and 40% common equity. If the before‐tax costs of debt, preferred stock, and common equity are 10%, 11%, and 14%, respectively, and the marginal tax rate is 40%, the WACC is closest to:
9.7%.
Which of the following statements is least accurate? A change in an accounting estimate is applied prospectively. A correction of prior period errors is made by restating all the financial statements presented in the financial report. A change in accounting principle is applied prospectively.
A correction of prior period errors is made by restating all the financial statements presented in the financial report.
Assuming the price remains constant, an increase in the treasury stock of a company will most likely cause:
A decrease in its price‐to‐earnings ratio.
A firm's culture that promotes loyalty to the firm over its clients is an example of:
A situational influence
In hypothesis testing a test statistic is:
A value that will decide whether to accept or reject the null hypothesis.
Vincent Allen, CFA, was a stock analyst with a large investment bank. He recently left to start his own research firm. Based on his memory, he reconstructed a few research reports on companies that he covered during his former employment. He was able to find all the supporting documents for his report online, except the meeting notes he had with the management of the covered companies, and then he published the reports. Which of the following is most likely true?
Allen is in violation of the Standard relating to record retention.
Risk budgeting in an enterprise:
Allocates the risk appetite across the different activities of the enterprise.
Held‐to‐maturity investments are most likely measured at:
Amortized cost.
Aquamarine Inc. is a manufacturer of perfumes and has several retail outlets throughout Europe. The company uses IFRS to report its financial statements and it recently entered into the following transactions: Transaction 1: Borrowed money from a bank for the purchase of inventory worth $180,000. Transaction 2: Made sales amounting to $990,000, of which $38,000 were made on credit. Transaction 3: Invested excess cash amounting to $12,000 in securities classified as held‐for‐trading and $8,000 in securities classified as held-to‐maturity. Transaction 4: Paid dividends amounting to $130,000. Which of the following is the least likely effect on Aquamarine's financial statements due to Transaction 2?
An increase in receivables of $38,000.
If a distribution is normal:
Approximately 68% of the observations will lie between the mean plus or minus one standard deviation.
Identify which of the following fintech technologies is not associated with lower costs for investors.
Artificial intelligence
Nick Austin has failed the CFA Level I exam three times and is registered for the exam for the fourth time. In his frustration, Nick publicly posted the following comment on his social media account: "I believe that the CFA Institute is limiting the percentage of passers so they can profit more from the exam fee!" Which is correct?
Austin is not in violation of Standard I(D) nor Standard VII(A).
Security‐market indices are least likely to be used for:
Benchmarks, to measure the performance of portfolios.
Which of the following least likely directly measures the risk of derivatives?
Beta
An indicator, which consists of a moving average, plus a higher line, which represents the moving average plus a set number of standard deviations from average price and a lower line that is a moving average minus the same number of standard deviations, is called:
Bollinger Bands.
Based on the relationships that have been observed between different asset classes, commodity prices are most likely to rise when:
Bond prices decline.
Technical analysis can most likely be applied to identify:
Both short‐term and long‐term trends.
Consider the following statements: Statement 1: All the portfolios on the capital market line are perfectly positively correlated. Statement 2: A risk‐free asset has zero correlation with all other risky assets. Which of the following is most likely?
Both statements are correct.
Consider the following statements: Statement 1: The cash flows in an interest rate swap are uncertain when the parties enter the contract. Statement 2: Cash payments in an equity swap depend on the returns on the underlying stock or stock index. Which of the following is most likely?
Both statements are correct.
Consider the following statements: Statement 1: One of the objectives of risk management is to minimize total risk. Statement 2: Separate strategic planning for each part of the enterprise is a key aspect of taking an enterprise view of risk governance. Which of the following is most likely?
Both statements are incorrect.
Consider the following statements: Statement 1: The weekend effect suggests that returns over the weekends tend to be higher than returns on weekdays. Statement 2: The holiday effect suggests that returns on stocks in the day prior to market holidays tend to be lower than other days. Which of the following is most likely?
Both statements are incorrect.
Which of the following has greater systematic risk as a proportion of total risk?
Broad market index fund
A technician observes that the CBOE Volatility Index (VIX) is extremely high. At the same time, the technician notes that his other technical analysis tools indicate the market is oversold. The technician will most likely consider this to be:
Bullish because the VIX, a contrarian indicator, is indicating that market participants fear an impending market decline and the other tools indicate an oversold market.
Alan Brown, an investment advisor, wants to set up his own firm. He is making all the legal arrangements to do so during his free time. His current employer is not aware of his activities. He is also informing all his current clients about his new venture and offering them discounts to do business with his new firm. Which of the following is most accurate? A. Alan is violation the standards, as he is setting up a new business during his free time B. Alan is violating the standards, as he is setting up a new business and soliciting the clients of his current employer. C. Alan is violating the standards by soliciting the clients of his current employer.
C. Alan is violating the standards by soliciting the clients of his current employer.
Carlo Rossi, an analyst at Think Advisory Inc., took the additional responsibility of completing a report that a colleague was working on before she went on maternity leave. Carlo was handling two important reports of the firm and was working on a tight deadline. As the deadline approached, Carlo realized that he could do extensive research for only one report. Therefore, for the other report, he decided to make his recommendations based on his insights and information from popular sources like trade journals and other industry reports. Which of the following is most accurate?
Carlo has violated the standards by relying on his insights.
A firm's fixed charge coverage has risen from five to seven times. This is least likely to be explained by the firm having:
Changed its policy and has started using operating lease arrangements to acquire the use of fixed assets.
Followers of behavioral finance believe:
Cognitive biases in investor behavior can explain pricing anomalies.
Which of the following statements regarding commodity indices is false?
Commodity prices are set by the market value of the commodities when they are bought at present.
Which of the following would be the most difficult to determine?
Cost of common equity.
Identify which of the following statements about distributed ledger technology (DLT) networks is not true.
DLT networks use a centralized trading network.
Which one of the following is least likely to be a reason why GIPS were created?
GIPS were established to compete with individual countries' regulatory requirements for performance measurement.
Which of the following statements is least likely?
Decreasing the significance level increases the power of a hypothesis test.
Which of the following will most likely lead to a decrease in equity?
Dividends paid
Shelly recently started at a Texas based institutional consulting firm that provides manager search and selection services. During the Christmas holiday she received gifts of chocolates, popcorn, and other holiday food items from numerous investment managers. With respect to Standard 1(B) of the Professional Code of Conduct, what must Shelly do?
Do nothing.
Some analysts prefer to use earnings before interest, taxes, depreciation, and amortization (EBITDA) rather than earnings per share to value a company's performance. Which of the following would support this preference?
EBITDA does not take into account the cost of using fixed assets.
Noncontrolling interests are typically presented under which balance sheet element?
Equity
Which of the following statements about fixed income indices is least accurate?
Equity securities outnumber fixed-income securities.
Determining the portfolio's asset allocation is part of the:
Execution phase.
Philander Hudson, a financial analyst, is estimating the intrinsic value of equity stock of Beaut Jewels Corporation using the Gordon growth model. Historically, the company has an average dividend payout ratio of 30%. The company reported net income of $11,000 million in the most recent financial year. The company had a financial leverage ratio of 2 and return on assets of 10%. The most recent annual dividend was $5.00 per share and the required rate of return on equity is 18%. Assuming the current stock price is $142.5, the stock is most likely:
Fairly valued.
If an analyst wants to review a firm's revenue recognition policies, she is most likely to refer to:
Financial statement footnotes.
Firm X, because of portfolio underperformance relative to its stated benchmark, decides to switch to a passive asset management strategy and does not inform its clients. At Firm Y, where individual asset managers are responsible for security selection, a new policy is implemented in which only stocks on an approved list constructed by the firm's senior manager may be purchased for client accounts. Several portfolio managers do not inform their respective clients. Firm Z recently changes its external manager of property investments and provides information of this change in the firm's annual report where external advisers are listed. The annual report is due for publication in seven months. Which firm(s) violated Standard V(B)?
Firm Y and Firm Z
A creditor will most likely consider a decline in which of the following ratios to be negative news?
Fixed charge coverage.
Managers of firms generally have superior information on the firm's operations; they can create conflicts of interest by using this information to:
Follow strategies to enhance manager remuneration packages
Which of the following formulas is incorrect as to the formula for computing free cash flow?
Free cash flow to equity = Cash flows from operations − Fixed capital investment − Net borrowing
What can be concluded from the following information? RevenueCOGSAdministrative ExpensesTraining ExpensesLioness Company100%67%15%8%Doe Company100%45%20%5%
From the operating profit margin, Doe Company is more profitable than Lioness Company.
A model that uses the relationship between security returns and earnings growth is most likely an example of a:
Fundamental factor model.
An investment management firm is considering hiring an analyst. The firm wants to assess how well the analyst does at forecasting quarterly earnings per share (EPS). To make the assessment, 44 quarterly EPS estimates by the analyst are examined and the average forecast error (predicted EPS value - actual EPS achieved) and its standard deviation are found to be 0.07 and 0.12, respectively. From the firm's perspective, the best outcome is for the analyst to achieve a mean forecasting error of zero. With μ as the population mean forecasting error, the null hypothesis (H0) to test the analyst's forecasting quality is:
H0: μ > 0.
Which one of the following is not an equity market index?
Hedge fund.
Which of the following is the right order of steps in making a correct ethical decision?
Identify, consider, decide and act, reflect
Randolph Investment Advisory Inc. offers different levels of service to its clients based on the amount invested by the clients. Randolph is least likely to violate the standards:
If it allocates shares based on prebooking done by the clients through an online portal.
Martin Green provides retirement planning advice to high‐net‐worth individuals. One of his clients, Sunhil Baal, is a successful entrepreneur who runs several small businesses locally. Green notices that Baal is currently contributing to his pension plan in a manner that is very tax inefficient. He consults a colleague, Paul Rodgers, and discusses the sources of income that Baal has and the pension contributions that he makes. Rodgers agrees that Baal could make significant tax savings through changing the way he contributes to his personal pension plan, and agrees to contact Baal regarding his situation. Which of the following statements is most accurate regarding Green's behavior? Green is:
In violation of Standard III(E): Preservation of Confidentiality
Escrow House Co. has a desired capital structure of 20‐30‐50 (preferred shares, debt, and ordinary shares, respectively). If the tax rate shifts from 38% to 30%, use the following information to determine the impact on WACC of the company: Before-tax cost of preferred stock: 8% Before-tax cost of common stock: 14% Before-tax cost debt: 17%
Increase of 0.408%
An investor's investment opportunity set most likely consists of:
Individual assets and portfolios.
Aquamarine Inc. is a manufacturer of perfumes and has several retail outlets throughout Europe. The company uses IFRS to report its financial statements and it recently entered into the following transactions: Transaction 1: Borrowed money from a bank for the purchase of inventory worth $180,000. Transaction 2: Made sales amounting to $990,000, of which $38,000 were made on credit. Transaction 3: Invested excess cash amounting to $12,000 in securities classified as held‐for‐trading and $8,000 in securities classified as held to‐maturity. Transaction 4: Paid dividends amounting to $130,000. Where is Transaction 4 least likely to be reported in Aquamarine's cash flow statement?
Investing activities
Which of the following statements relating to the biases of investors is least likely to be false?
Investors assume good businesses or good markets are automatically good investments.
The beta of an asset:
Is 1 if the asset is the market portfolio.
Nathalie Anderson, CFA, is comparing the annual inflation rate of the Commonwealth, which includes 53 member countries. The mean inflation rate of the countries was 8.00% and the population standard deviation was 3.00%. Which of the following interpretations on the confidence intervals for the mean inflation rate is least accurate? Note: z 0.05 = 1.65, z 0.025 = 1.96, z 0.005 = 2.58
It can be concluded with 99% confidence level that the population mean inflation rate is between 6.97% and 9.03%.
Which of the following is an advantage of Monte Carlo simulation over historical simulation?
It is a useful tool for financial professionals to conduct "what‐if" analyses.
An investor is trying to predict the returns of a stock one year from now. He has decided to base his analysis on historical returns; hence, he has found that the stock has generated a 5%, −3%, 6%, and 4% return in its four most recent years of operation. What is the most appropriate metric to use?
It is best to use the arithmetic mean.
Which of the following is least likely to be considered a limitation of the CAPM?
It is complicated to apply.
TeleNorth is a publicly listed telecommunications company that is a partially state‐owned entity in the Republic of Norcorrea. The Norcorrean government holds "golden shares" that carry additional voting rights to ordinary shareholders. Which one of the following statements is most accurate from a corporate governance point of view?
It may be very difficult for the ordinary shareholders to change the voting system unless the government moves to change the system itself.
Which of the following statements most likely describes the role of the income statement?
It reports the financial performance of the firm over a period of time.
An endowment fund is looking for an active manager who will add value to its index, but also track the benchmark's performance over time without making any large index relative bets. What sort of benchmark relative tracking error would be preferred by the endowment given this mandate?
Low tracking error.
Haruto Ito, CFA, is a bank analyst with Tokyo Securities. On a recent trip to see a bank that he covers, he was presented with a rosy outlook for the bank's earnings in the next two years, which is above the consensus expectations. When probed further about the assumptions, the CFO inadvertently mentioned that serious discussions are taking place for a tender offer of a smaller well‐managed bank that Ito also covers. This information has not been made public. Ito feels very lucky to receive this unexpected tip and rushes back to his office to revise his projections and advise his major clients to buy the smaller bank's stock. What should Ito have done instead?
Ito should refrain from taking any action on the smaller bank's stock until the bank has made the tender offer information public.
Jake Gore, an employee of Kenpek Investments Inc., is informed that Kenpek is one of the three contenders for the underwriting of a leading IPO. Jake immediately calls his friend in one of the other firms that could be possibly handling the IPO and books shares. Which of the following statements is most accurate?
Jake should inform his employer about his investment before booking the shares.
Adrian Cruise, a manager at Vixto Electricals Corp., learned that the company terminated the contract of Britotech Inc., the company that provided IT support to Vixto. Adrian brought this up while visiting his friend John McGuire, who is an investment advisor at Krixo Investments. Adrian also mentioned to John that Vixto was the biggest client of Britotech. Which of the following statements is least accurate?
John will violate Standard II(A) if he uses this information to trade on Britotech's stocks, as this is nonmaterial nonpublic information.
Kim Cook, CFA, is an analyst for Zinc Investment Bank. Kim's sister works in the research department of Magnum Pharma Corp., and informs Kim about Magnum's acquisition of new patent for a cancer drug that will increase the revenue of Magnum by $20 million. Magnum is planning to announce this acquisition only after completing all the formalities. Based on this information, Kim recommends that his clients buy Magnum's shares. Which of the following statements is true about Kim's action?
Kim has violated Standard II(A).
Tom Haverford, a corporate officer, asked Andy Dwyer, a portfolio manager, to invest his excess savings in a fund. However, the fund is invested in equity securities of Haverford's company, and corporate officers are restricted from investing in their own firm's stock. Which of the following investment constraints best describes the scenario?
Legal and regulatory
Lenny Holmes, joined a brokerage firm where her sister Penny Holmes is a client. Which of the following approaches of Lenny will least likely be in accordance with the Standards of Professional Conduct?
Lenny provides investment reccomendations to Penny only after disseminating information to all other clients to avoid any accusation of wrongdoing.
Which of the following is most likely a financial risk?
Liquidity risk
Which variant of the dividend growth model would be most appropriate for a firm temporarily losing market share and growing slowly, with growth expected to stabilize to a constant rate at some point in time?
Multistage
Which of the following most likely qualifies as a valid definition of an individual investment firm with respect to GIPS?
NOT "A software firm that provides asset valuation, performance measurement, and trade analysis programs to institutional investors." HINT: GIPS require that in order to be defined as an individual firm for compliance purposes that it must be an asset manager and be a distinct business unit or subsidiary held out to the public as a quasi‐independent entity.
Which of the following characteristics is least likely to be assessed by using only the Statement of Financial Position?
NOT "Ability to maintain its liquidity position"
The following are transactions for Clear Water Company. Which of the following is not part of other comprehensive income (OCI)?
NOT "Adjustments for minimum pension liability"
Which of the following is not a requirement for Composite Construction under the GIPS?
NOT "Firms must not link performance of simulated or model portfolios with actual performance."
Which transaction would best be classified as a gain or loss?
NOT "Match Tix was able to charge a 50 percent premium over face value for high demand concert tickets."
When dealing with a sample, a _________ is a summary measure used to describe the data set's characteristic.
NOT "Parameter" Probably Statistic
Dinah Bonnevie, CFA, was elected to the board of directors of a worldwide charitable organization with the written consent of her employer. The organization has recently started a fund‐raising campaign for a vaccination program in Africa. Knowing that most of her clients make regular charitable donations, she includes a section in her regular newsletter covering her directorship with the charity and the fund‐raising campaign. Did Bonnevie violate Standard III(E) Preservation of Confidentiality?
No
Patrick Reyes, CFA, just started his job as an investment adviser with Grant Corporation. On his first day of work, his supervisor asked him to solicit clients of his previous employer for business. Will Reyes violate the Standard if he follows his supervisor's instruction?
No, as long as he knows the clients' contact information from memory or publicly available information.
Stocktip.com is one of the top stock rating websites with millions of paying and nonpaying subscribers. Any change in its stock rating is supported by diligent research and has a material impact on the stock price. As part of the service, Stocktip always emails changes in stock rating to their paying subscribers before posting it on their website. Is this a violation of Standard II(A)?
No, paying subscribers have the right to receive the information first.
Which of the following scales represents the weakest level of measurement?
Nominal scales.
A Type II error in hypothesis testing is:
Not rejecting the null hypothesis when it is false.
What happens to the breakeven number of units a firm should produce as variable costs rise assuming all other things are held equal?
Number of units rises.
A client wishes to protect the value of his capital. Which of the following portfolios will be optimal from a safety‐first analysis? PortfolioExpected ReturnStandard DeviationA2512B158C106
Portfolio A
Which of the following portfolios is most suitable for an aggressive investor, with low risk aversion? PortfolioRisk‐Free Asset AllocationMarket Portfolio AllocationA 75 percent 55 percentB 0 percent100 percentC‐30 percent130 percent
Portfolio C.
A commodity index is most likely to be constructed based on:
Prices of futures contracts on commodities.
A code of ethics sets out:
Principles of behavior for a group
Of the following statements about private equity, which is most likely correct?
Private equity securities are typically offered only to institutional investors.
Which of the following is least accurate about ratio analysis?
Ratios are not affected by different accounting treatments used by companies.
Assuming no inflation, which of the following reflects individuals' preferences for current versus future consumption?
Real risk‐free interest rate.
An auditor is most likely to issue a qualified opinion when the financial statements:
Reflect a true and fair representation of a firm's transactions except for few material errors.
Using derivative instruments to change the distribution of risk outcomes is most likely a form of:
Risk shifting.
Among the following three types of investors, which type of investor has the greatest slope in their indifference curves?
Risk‐averse investors.
Among the following three types of investors, which type of investor will value a risk‐free asset most, based on their utility functions?
Risk‐averse investors.
A stock's price pattern has taken on a head and shoulders shape. A technician is explaining to a client where this pattern is categorized and its implication for the stock's price. The technician will most likely state that its pattern category and implication are: Pattern CategoryStock Price ImplicationA.ReversalNegativeB.ContinuationNegativeC.ContinuationPositive
Row A
The dependent and independent variables in the capital allocation line equation are most likely: Dependent VariableIndependent VariableA.Expected returnTotal riskB.Total riskMarket risk premiumC.Expected returnMarket risk premium
Row A
An investor's trades in a stock over a period of 2 years are given below: Purchased 10 shares on July 1, 2007 for $50/share. Purchased another 5 shares of the same stock on July 1, 2008 for $100/share. Sold all shares on July 1, 2009 at $90/share. Assuming that the stock doesn't pay any dividends, her money‐weighted and time‐weighted rates of return are closest to: Money‐Weighted RORTime‐Weighted RORA.23.23%34.16%B.21.75%34.16%C.23.23%48.32%
Row B
Rafi Binder is an oil industry analyst at a brokerage firm. He recently read an article in the Wall Street Journal describing a research study that analyzed global oil reserves. Binder thinks this study would provide insight into the long‐term movement of oil prices and wants to quote the study in a research report he is preparing. Using the Journal article to identify the author as Dr. Rangoon of State University, Binder obtained a copy of the original research study and used several excerpts in his oil industry report. In citing the source of the excerpts, Binder must credit: Wall Street JournalThe Original Study A.Yes No B.No Yes C.Yes Yes
Row B
The following information relates to Global Manufacturers for the year ended 2009: Net income = $2,440,000 12% preferred stock = $850,000 Dividends paid to common shareholders = $50,000 Weighted average number of common shares outstanding = 2,000,000 The company also has $100,000 par of 8% convertible bonds outstanding, which are convertible into 20,000 shares of common stock. Given that Global Manufacturers pays taxes at the rate of 35%, its basic and diluted earnings per share are closest to: Basic EPS ($)Diluted EPS ($)A1.221.21B1.171.16C1.141.14
Row B
An analyst gathered the following information regarding three portfolios. Which portfolio is most likely to plot below the Markowitz efficient frontier? Portfolio Expected ReturnStandard DeviationA8%13%B15%16%C11%20%
Row C
Before entering an arrangement involving additional compensation from a party other than your employer, the Duties to Employers Standard requires written consent be received from: Your Employer The Other Party A.Yes No B.No Yes C.Yes Yes
Row C
Consider the following cases and ascertain the best probability method to be used in each case. Case 1: The probability of the sales growth rate of a company exceeding its historical average in the next decade is 75%, considering the recent demographic events. Case 2: The prospect of the share price going down has a probability of 33.33%. Case 3: The net income distribution based on the past 10 years is used as it is to prepare financial budgets. Empirical ProbabilitySubjective ProbabilityPriori Probability A.Case 3Case 2Case 1 B.Case 2Case 1Case 3 C.Case 3Case 1Case 2
Row C
Marie Tipoli is a portfolio manager for NQA Investments. She is assigned to manage the portfolio of Anthony Barito. Barito's income seems to be derived from a variety of businesses in which he has a minority interest. A police detective approaches Tipoli and explains that Barito is being investigated for alleged money laundering. Tipoli immediately discusses the matter with her supervisor and her personal attorney without contacting Barito. Did she violate the Standards of Professional Conduct by discussing Barito's affairs with her: Supervisor? Attorney? A.Yes Yes B.Yes No C.No No
Row C
When available‐for‐sale securities are held by a firm, under U.S. GAAP, an unrealized gain is: Income StatementBalance SheetA.RecognizedRecognizedB.RecognizedNot recognizedC.Not recognizedRecognized
Row C
Which of the following is most accurate when measuring the performance of investment managers? Deposition of FundsEffectA.Prior to a period of superior performanceMoney‐weighted return ﹤ Time‐weighted returnB.After a period of superior performanceTime‐weighted return ﹤ Money‐weighted returnC.Prior to a period of poor performanceMoney‐weighted return ﹤ Time‐weighted return
Row C
Which of the following descriptions is most likely true of behavioral finance biases theory? Behavioral Finance BiasesDescriptionA. Disposition effect:Investors focus on issues in isolation.B. Conservatism:Investors are quick to realize gains but avoid realizing losses.C. Gambler's fallacy:Investors' estimates of future probabilities are affected by recent outcomes.
Row c
Which of the following is a standard‐setting approach likely to be adopted by a standard‐setting body?
Rules‐based approach.
An investor gathered the following information regarding three stocks, which are not in the market portfolio: StockActual ReturnStandard DeviationBetaA22%25%1.1B17%30%1.4C19%23%0.8 The return on the market portfolio is 15% with a standard deviation of 21%, and the risk‐free rate of return is 4%. Which stock should the investor least likely add to the market portfolio?
STOCK B
An informationally efficient market is one where:
Security prices adjust rapidly to the arrival of new information and therefore security prices reflect all information about the security.
Which of the following processes is the most likely to be included in the planning step of the portfolio management process?
Select an appropriate investment strategy.
A very wealthy investor is most likely to structure her portfolio with which of the following investment vehicles?
Separately managed account.
A disadvantage of many profit‐sharing remuneration plans is that:
Short‐term targets encourage managers to take excessive risks.
Sam Smith, a portfolio manager, has invested in Ken Petrochemicals Corp. He discovers that Clarke Consultancy Inc., a leading financial research firm, is planning to give a sell recommendation of Ken's stocks. Sam approaches Jim Clarke, the head of the research firm, and requests Jim to postpone the publication of the research. Jim agrees to the request for a deal from Sam. Which of the following statements is most accurate? Statement I: Jim has violated Standard III(A). Statement II: Both Jim and Sam have violated Standard II(B) related to market manipulation and Standard I(B) related to independence and objectivity. Statement III: Both Jim and Sam have violated Standard V(A) Diligence and Reasonable Basis.
Statements I and II.
Joel Sandow, an investor, wants to go short on a stock that is currently priced at $40. However, he anticipates the prices to rise during this period. To protect against the adverse price movements, Sandow will most likely enter into a:
Stop order.
A set of data that is normally distributed is least likely to exhibit which of the following characteristics?
Strong outliers.
Which of the following actions will least likely strengthen a strong‐form efficient market?
Strong prohibitions on insider trading.
According to the IASB's 2010 Conceptual Framework, the objective of general purpose financial reporting is to provide information to aid in the decisions of which of the following groups?
Suppliers of trade credit.
Which of the following is least likely required of fiduciaries that are responsible for pension plans?
Supporting the sponsor's management during proxy fights.
Historic analysis suggests that stocks trading on a low price/book value have tended to outperform the market. If the analysis has not included companies that have gone bankrupt, then the analysis could be biased due to:
Survivorship bias.
Gerard Tan and Margaret Cho are currently registered for the CFA Level II exam. Tan's business card reads, "Gerard Tan, CFA Level I." Cho's resume states, "Level II Candidate in the CFA Program." Who violated the Standard regarding use of the professional designation?
Tan only
Operational risks usually refer to the risks:
That are internal to a firm.
When calculating different types of probabilities, certain rules must be followed. Which of the following statements does not adhere to these rules?
The addition rule is utilized in order to solve for the probability of two events occurring simultaneously.
Which of the following statements is untrue regarding arithmetic and geometric return calculations?
The arithmetic return will always be lower than the geometric return.
A company gives credit terms to its customers and changes the terms from 2/10 net 30 to 2/10 net 20. This is most likely to reduce:
The average days of receivables.
Which of the following is most accurate? Diversification reduces interest rate risk. Adding more stocks to a portfolio does not change the systematic risk. The diversifiable risk for a specific firm can be assumed to be similarly applicable to competitors in the same industry.
The diversifiable risk for a specific firm can be assumed to be similarly applicable to competitors in the same industry.
If a firm's quick ratio is above the industry average but the cash ratio is below the industry average, this might be explained by:
The firm has extended to its customers more favorable credit terms than its competitors.
The Callen Group of Hotels purchases a new boutique hotel. There is a one‐time investment of $10 million followed by a steady stream of cash inflows in the coming years. Which of the following situations is least likely to occur in the capital budgeting analysis of this investment?
The initial investment is more than the present value of cash inflows, and the profitability index is 1.
Melena Anderson, an analyst, is in the process of estimating the intrinsic value of Dazzle Industrial Corporation's common stock. She is planning to estimate the value using eight different methods under three different labels. The methods to be used are as follows: LabelsMethodsPresent value modelsGordon growth model and free‐cash‐flow‐to‐equity modelMultiplier modelsPrice‐to‐earnings multiple, price‐to‐book multiple, price‐to‐sales multiple, price‐to‐cash‐flow multiple, and enterprise value multipleAsset‐based valuation modelBook value model Later, Melena decides that she will estimate the intrinsic value using only three methods. Assuming Melena uses one method from each of the labels, which of the following should be used to calculate the number of ways the methods can be allocated?
The multiplication rule of counting.
Which of the following is least likely to be an assumption of technical analysis?
The prices of securities reflect all past market trading data.
The Code of Ethics requires members and candidates to act with integrity, competence, diligence, respect and in an ethical manner when dealing with:
The public, clients and prospective clients, employers, employees, colleagues in the investment profession, and participants in global markets.
Mr. and Mrs. Nabulsi are 44 and 41 years old, respectively. They have two children, 14 and 16 years old. They are successful and highly paid professionals. They have two primary investment objectives, retirement and providing for their two children's education. They plan to retire when they turn 65 years old. Their liquidity constraint is best described by which of the following phrases?
Their IPS should address the expected payments for their children's education and account for it in the asset allocation.
Which of the following statements is least accurate about the Standards of Professional Conduct?
There should be a firewall between departments to control interdepartmental communications.
In order to evaluate a company's ability to meet its long‐term obligations, an analyst will most likely examine its:
Total debt ratio
If a market is operationally efficient, it means that:
Transaction costs are minimized.
Which of the following is least likely a continuation pattern?
Triple top
Which of the following statements is least accurate?
Type I error is accepting the null hypothesis when it is false.
Which of the following statements regarding Global Investment Performance Standards (GIPS) is most accurate?
Under GIPS, firms are required to present at least five years of performance, or for the period since the firm's inception if the firm has been in existence less than five years, that meets the requirements of the GIPS standards.
If a company receives cash before it recognizes the associated revenue it results in a(n):
Unearned revenue liability.
Jon Snow, a portfolio manager, was instructed by Arya Stark, his client, not to invest in stocks of companies with high carbon emissions. Jon Snow faces an investment constraint on:
Unique circumstances.
A company's other comprehensive income most likely includes:
Unrealized gains and losses from cash flow hedging derivatives.
Which of the following is least likely to be an adjustment made to book value in order to make it better reflect the value of shareholders' investment?
Use historic average of past book values over a business cycle.
Charles Uy is a CFA charter holder and the chief financial officer at Makata Manufacturing. Uy is currently under investigation by Makata's Corporate Compliance Division. This is because of an anonymous written complaint accusing Uy of facilitating money‐laundering activities for government officials in a developing country. What should Uy do?
Uy should disclose the allegations on his Professional Conduct Statement.
The primary determinant of portfolio returns is how the portfolio manager allocates funds across:
Various asset classes.
Which of the following statements is the least accurate statement regarding verification of compliance with GIPS?
Verification has been a requirement since January 1, 2000.
Toby Green, CFA, works in an equity brokerage department at Mulberry Securities. Green has reviewed a report from the firm's research department that suggests Crown Appliances is rated a "buy" because the sales figures for the firm's new products have been better than those of the closest competition. Green lives on the same street as the CFO of Crown Appliances. While waiting for the train to work, Green accidentally overheard the chief financial officer of Crown Appliances report to his colleague on a mobile phone about an announcement in the morning newspaper that a competitor has just launched a website for appliance distribution over the Internet. Upon returning to his office, Green tipped his father to sell his holding based on this new information, but he still recommends a "buy" to all Mulberry's clients. Green:
Was in full compliance with the Code and Standards.
In which of the following cases should a portfolio manager take it upon himself to explain to a client the contradiction in his risk profile?
When the client's ability to take a risk is above average and his or her willingness to take the risk is below average.
One of the main reasons trust is important in the investment industry is that clients of investment firms:
Will find it difficult to check accuracy of information and the quality of services they are provided
A moving averages trend line:
Would prompt an investor to buy a stock when the stock price is falling toward its moving average.
Lana Torres, CFA, is a founder of her own private investment advisory practice serving senior clients with high net worth. Since inception, Torres has always invested her clients' money in blue‐chip stocks with high dividends. With the recent boom of technology stocks, Torres determined that the technology stocks will have a better return for her clients in the medium term and allocated a portion of her clients' assets into the small‐cap technology stocks that she has done thorough analysis on. She plans to inform clients of this change in her next market commentary in three months. Did Torres violate any CFA Institute Standards?
Yes, because she did not inform her client about the change in the investment process promptly.
Lourdes Conti, CFA, is a portfolio manager at a global investment bank, which has an approved vendor for international equity research service. Since Conti is looking at an investment in a country where the capital market is very unique in terms of structure and regulations, she has reason to question the validity of the research conducted by the approved vendor. Hence, she has done her own due diligence and found a local research firm that knows the market well. Did she violate Standard V (A) if she uses the approved vendor, instead of the local research firm?
Yes, because she should not rely on the research when she has reasonable doubt in its validity.
Dave Johnson, an analyst at Star Bank, works as a golf coach during his leisure time. He is doing well in his coaching and is even considering setting up a golf academy in the future. Should Dave inform his employer about his second profession?
Yes, he should inform his employer if the amount he earns is substantial in comparison to his current salary at the bank.
During an internal meeting, Jack O'Neil, CFA, who is the fund manager of the firm, had a disagreement with an analyst on one of the stock picks. At the end, Jack stated that the analyst must listen to him because he is a CFA charter holder and therefore knows better. Did Jack violate any of the CFA Institute Standards of Professional Conduct according to the Standards of Practice Handbook?
Yes, he violated the standard pertaining to Responsibilities as a CFA Institute Member.
Susan Jenkins is a portfolio manager for the Jenkins Large‐Cap Value Fund. The fund's mandate states that it will invest in large‐cap, low P/E stocks with solid fundamentals. Jenkins feels that value stocks are currently out of favor with the market and changes the fund's asset mix to include 30% growth stocks and 20% small‐cap stocks. Over the next quarter, the fund's performance improves. Did Jenkins violate the Standards of Professional Conduct?
Yes.
A major difference between a hedge fund and a mutual fund is that the hedge fund has:
a much larger required minimum investment.
Retrospective application is least likely to be used for accounting:
changes in accounting estimates.
Technicians make use of:
company financial statements.
In the event that local law is in conflict with GIPS, firms must:
comply with local law and disclose the nature of the conflict.
From a technician's view, a stock will most likely be in a downtrend because:
demand is being overwhelmed by supply.
The net present value (NPV) profiles for two projects have been graphed together. The point where the two profiles intersect (cross lines) is best described as being where each:
project has the same NPV.
Victoria Anderson, CFA, works for Pluto Capital, a newly established investment counseling firm. The founding partners of Pluto Capital came from Vulcan Investments after it was taken over by a large financial services group. Jonathan Beecham is meeting with Pluto Capital for the first time because he has been disappointed by Vulcan's underperformance following the takeover. At the beginning of their meeting, Anderson sympathizes with his situation, then immediately explains to Beecham that she has discovered an undervalued stock that offers large potential gains. Anderson then promises Beecham that she can buy the stock for his account at the current price if he switches the account within 48 hours. Anderson's best course of action to avoid violating the Standards was to have:
determined Beecham's investment needs, objectives, and tolerance for risk before making any investment recommendation.
An analyst is asked to explain Monte Carlo simulation to a client. The analyst is most accurate when she states that a Monte Carlo simulation:
does not provide an exact result, but instead provides statistical estimates.
Sharpe ratio and Roy's safety‐first ratio will be equal when the risk‐free rate of return (RF), as compared to the critical level (RL), is:
equal.
Whistleblowing can best be described as an act of:
exposing illegal activity in a firm.
The Farmer's Almanac says that temperatures during the next growing season will be below normal and that this will have a negative effect on the corn yields. A corn processor reading this report in January is concerned that his input costs will rise if the September corn harvest is low. In order to stay competitive with other processors, he will be forced to accept lower profits. He decides to buy corn futures for September delivery. The corn processor is best described as being a(n):
hedger.
In hypothesis testing, the probability of rejecting the null hypothesis when it is true is the:
level of significance.
An analyst has developed a model to predict the GDP growth rate for countries. He started with 20 variables, eliminated those that did add predictive value, and then added new variables when necessary. The final combination of variables that worked best comprised 12 variables. The model has been tested on out‐of‐sample data and it was successful in predicting GDP growth. The next step for the analyst is to:
make sure that the 12 variables being used make sense from an economic standpoint.
With respect to composites, GIPS requires that a firm:
may define composites itself as long as the classification is made ex ante.
Categorizing firms according to sector and industry classifications is an example of:
nominal scaled data.
Impairment write‐down for long‐lived assets will most likely result in a decrease in total:
non‐current assets
A corporation is considering funding a potential investment project by using debt only. The project's initial cash flow projections were developed without considering how the project would be financed. Assuming the corporation decides to use only debt financing, then the project's net present value analysis most likely should:
not be adjusted to reflect the effect of the project's all‐debt funding on the cash flow or on the discount rate.
mePhone and uPhone, two cell phone manufacturers, have estimated sales of 10,000 units each. If the two companies have identical operating risk but different financial risk, they are most likely to have identical sensitivity of:
operating income to changes in unit sales.
The financial report, which summarizes a company's economic resources and the claims against those resources, will most likely be used by an analyst to determine a company's financial:
position.
A portfolio manager randomly samples 10 of the 100 sell‐side earnings estimates for a company. The sample mean was $3.35 and the standard deviation was $0.05. Subsequently, the portfolio manager finds a website that calculates the average for all 100 earnings estimates, with the average being $3.45. The difference between the sample mean of $3.35 and the population mean of $3.45 is most likely the result of:
sampling error.
A company that is sensitive to the business cycle would most likely:
sell products that the customer can purchase at a later date if necessary.
When an analyst is estimating the value of a security, such as stock, he or she is most likely assuming that the:
share price in the market is not necessarily the best estimate of intrinsic value.
A technician will most likely believe that:
supply and demand determine stock's price.
For a portfolio comprising many assets, the most important factor to consider when adding an asset to the portfolio from the standpoint of diversification is:
that security's average covariance with the other assets.
The rate of return required by owners of a company's common stock is equal to the:
weighted average cost of capital.
The axes of the NPV profile of a project are:
x‐axis: different discount rates; y‐axis: NPV
In an order‐driven market that allows hidden and partially hidden orders, the order that will most likely have the highest priority is a buy order with a price of:
¥150.15 and the order quantity must be totally hidden.
You deposit €5,000 in a bank that offers to pay you 10% interest, compounded quarterly. Assuming no withdrawals are made, your account balance at the end of five years will be closest to:
€8,193.
Beta Inc. is an exporter of refined sugar. During 2009, it earned net income of $104,000, purchased inventory worth $13,000, and invested in new machinery worth $28,000. The company had previously invested in available‐for‐sale securities which were sold during the year for $8,000. The company's cash flow from investing activities is closest to:
−$20,000
