CFA Mock Exam 5 = Mock Exam 3 Session 1

When constructing a forecast, an analyst with a conservatism bias is most likely to: A. deemphasize new information when updating their forecast. B. seek opinions and information that agrees with their forecast. C. build complex models using a wide breadth of data to create a forecast.

A. deemphasize new information when updating their forecast. because people with conservatism bias maintain their prior views or forecasts by inadequately incorporating new information. This often happens in forecasting when an analyst does not update their forecasting after receiving conflicting information, such as disappointing earnings results or a competitor action.

Which of the following is a violation of the Standards when local laws require firms to maintain client confidentiality? A member: A. discloses information relating to illegal activities of a client to local authorities B. refuses to share details of a prospective client with his firm's marketing department C. refuses to disclose information about a client during an investigation by the CFA Institute Professional Conduct Program

A. discloses information relating to illegal activities of a client to local authorities because according to Standard III(E), Preservation of Confidentiality, if applicable law requires members and candidates to maintain confidentiality, even if the information concerns illegal activities on the part of the client, members and candidates should not disclose such information. Therefore, the member has violated Standard III(E) by disclosing information relating to illegal activities of a client to local authorities.

Compared to shareholders in public companies, shareholders in private companies typically: A. have longer holding periods. B. can sell their shares more easily. C. have less control over management.

A. have longer holding periods. because corporate issuers may issue additional equity shares in the capital markets from time to time. For a public issuer, these shares can be traded in the secondary market once they're issued. In contrast, private companies finance smaller amounts in the primary market (private debt or equity) from fewer investors who typically have longer holding periods.

Which of the following is not a requirement of the GIPS standards? Firms are required to: A. have their performance records verified by an independent third party B. include all discretionary, fee-paying portfolios in at least one composite C. present a minimum of five years of annual investment performance compliant with GIPS standards

A. have their performance records verified by an independent third party because it is a recommendation but not a requirement that firms obtain independent third-party verification to claim GIPS compliance.

A central bank most likely: A. lends money to banks facing serious shortages. B. is one of many supplier's of a country's currency. C. does not manage a country's foreign currency reserves.

A. lends money to banks facing serious chortages

According to the GIPS standards, a firm must: A. provide a GIPS composite report to all prospective clients. B. include terminated composites on the firm's list of composite descriptions for at least seven years after the composite termination date. C. attain compliance for a minimum of three years or since firm inception if the firm has been in existence for less than three years to initially claim compliance.

A. provide a GIPS composite report to all prospective clients. because according to the GIPS standards, firms must make every reasonable effort to provide a GIPS composite report to all prospective clients when they initially become prospective clients. Firms must not choose to which prospective clients it presents a GIPS composite report.

An analyst gathered the following information about a stock index: *Mean net income for all companies in the index = $2.4 million *Standard Deviation of net income for all companies = $3.2 million If the analyst takes a sample of 36 companies from the index, the standard error of the sample mean is closest to: A. $88,889. B. $400,000. C. $533,333.

C. $533,333. Correct because the standard error of the sample mean is equal to the population standard deviation (σ) divided by the square root of the number of observations in the sample (n): 𝜎𝑋⎯⎯⎯⎯=𝜎/𝑛⎯⎯√=$3,200,000/36⎯⎯⎯⎯√=$533,333 Estimation and Inference explain the central limit theorem and its importance for the distribution and standard error of the sample mean

An investment pays $1,000 at the end of each year in perpetuity, with the first payment occurring six years from today. If the discount rate is 9% per year, the present value of the investment today is closest to: A. $4,486. B. $6,625. C. $7,221.

C. $7,221. because it is the present value of the perpetuity that starts in six years: PV of investment today = (PV of perpetuity in 5 years)/(1 + r)5, where PV of perpetuity in 5 years = A/r = $1,000/0.09 = $11,111.11. Thus, PV of investment today = $11,111.11/(1 + 0.09)5 = $7,221.46 ≈ $7,221. Calculator solution: N = 5; I = 9%; FV = -11,111.11; compute PV = 7,221.46.

An analyst gathers the following information (in € millions) about a company's 4-year construction contract: *Contract price = 106 *Expected total costs = 70 *Actual costs incurred in Year 1 = 21 *Bonus for on-time completion = 8 Costs incurred are an appropriate measure of progress toward completion. The construction company is very experienced with similar contracts. If it is highly probable revenue will not be subsequently reversed, revenue (in € millions) recognized in Year 1 is most likely: A. 31.8 B. 33.8 C. 34.2

C. 34.2 because both the contract revenue and bonus should be calculated based on progress toward completion. A company is only allowed to recognize variable consideration if it can conclude that it will not have to reverse the cumulative revenue in the future. Answer is calculated as 21/70 × (106 + 8) = 30% × 114 = 34.2

An analyst gathers the following information (in E thousands) about an electronics manufacturing company: YEAR 2: *Cost of Sales: 1,250 *Cost of inventory: 225 *Net realizable value of inventory: 300 YEAR 2: *Cost of Sales: 1,000 *Cost of Inventory: 375 *Net realizable value of inventory: 325 Changes to the allowance for inventory obsolescence have already been reflected in cost of sales. The inventory turnover (based on average inventory) for Year 2 is closest to: A. 4.0 B. 4.2 C. 4.5

C. 4.5 because IFRS state that inventories shall be measured (and carried on the balance sheet) at the lower of cost and net realizable value and Inventory turnover ratio = Cost of sales ÷ Average inventory. Accordingly, Inventory turnover ratio = 1,250 / [(225 + 325)] / 2 = 1,250 / 275 = 4.545 ≈ 4.5.

Which of the following parties can perform verification of a firm's claim of compliance with the GIPS standards? A. CFA Institute B. An internal auditor of the firm C. An independent third-party consultant

C. An independent third-party consultant because according to GIPS standards, once a firm claims compliance with the Standards, they may voluntarily hire an independent third party to perform a verification in order to increase confidence in the firm's claim of compliance. Therefore, only an independent third-party consultant can perform verification of a firm's claim of compliance with the GIPS standards.

an analyst gathers the following information about a currency pair: *Current Pair= USD/EUR *Spot Rate= 1.1800 *Expected Spot Rate in One Year = 1.1650 The expected change in value of the dollar relative to the euro over the nest year is closest to a(n): A. Depreciation of 1.27% B. Appreciation of 1.27% C. Appreciation d 1.29%

C. Appreciation of 1.29% Correct because to convert the dollar to the base currency, the calculation is (1/1.1650)/(1/1.1800) - 1 = (1.18/1.165) = 1.2876 ≈ 1.29% which is an appreciation.

A firm operating in a perfectly competitive market will most likely shut down in the short run when: A. average total cost is higher than marginal revenue. B. average fixed cost is higher than average revenue. C. average variable cost is higher than average revenue.

C. Average variable cost is higher than average revenue because if TR (total revenue) cannot cover TVC (total variable cost), the firm shuts down production to minimize loss. Also, average revenue (AR) is revenue per unit. Further, average variable cost (AVC) is the ratio of total variable cost to total output: AVC = TVC/Q. Therefore TR < TVC implies that AR < AVC.

Immediately after taking the CFA Level II exam, Tim Riley posts on social media broad topic areas that were not tested on the exam. He also posts an article on social media questioning the relevance of CFA Program for professional practice. Has Riley violated the Standards? A. No B. Yes, by posting broad topic areas not tested on the exam C. Yes, by questioning the relevance of CFA Program for professional practice

B. Yes, by posting broad topic areas not tested on the exam Correct because according to Standard VII (A), Conduct as Participants in CFA Institute Programs, examples of information that cannot be disclosed by candidates sitting for an exam include but are not limited to broad topical areas and formulas tested or not tested on the exam. Riley violates this Standard by posting on social media broad topical areas not tested on the exam.

Credit cycles: A. can amplify business cycles B. are defined as fluctuations in real GDP C. tend to be shorter than business cycles

A. can amplify business cycles because it is recognized that in a world with financial frictions, business cycles can be amplified, with deeper recessions and more extensive expansions because of changes in access to external financing. In line with this, it is found that the duration and magnitude of recessions and recoveries are often shaped by linkages between business and credit cycles.

An analyst examining the statement of cash flows for possible manipulation is least likely to be concerned about a(n): A. cash flow from operations to net income ratio consistently higher than 1. B. increase in cash from operations arising from a large change in accounts payable. C. change in the classification of interest paid from an operating cash flow to a financing cash flow.

A. cash flow from operations to net income ratio consistently higher than 1 because a cash flow from operations to net income ratio that is consistently higher than 1 indicates that operating cash flow is consistently higher than net income and signals high earnings quality.

Suni Kioshi, CFA, is an analyst at Pacific Asset Management, where she covers small capitalization companies. On her own time, Kioshi often speculates in low price thinly traded stocks for her own account. Over the last three months, Kioshi has purchased 50,000 shares of Basic Biofuels Company giving her a 5% ownership stake. A week after this purchase, Kioshi is asked to write a report on stocks in the biofuels industry with a request to complete the report within two days. Kioshi wants to rate Basic as a "buy" in this report but is uncertain how to proceed. Concerning the research report, what action should Kioshi most likely take to prevent violating any of the Standards? A. Sell her shares B. Don't recommend a buy C. Disclose her stock ownership

C. Disclose her stock ownership because the manager's ownership stake is a potential conflict of interest, which should be disclosed as required by Standard VI(A), Disclosure of Conflicts.

Which of the following functional forms of a simple linear regression is most appropriate to test the linear relationship between relative changes in the dependent variable and relative changes in the independent variable? A. The lin-log model B. The log-lin model C. The log-log model

C. The log-log model because the log-log model, in which both the dependent variable and the independent variable are linear in their logarithmic forms, is also referred to as the double-log model. This model is useful in calculating elasticities because the slope coefficient is the relative change in the dependent variable for a relative change in the independent variable.

Which of the following statements about dispersion measures is most accurate? A. The range shows how the data are distributed B. The variance is expressed in the same unit of measurement as the observations C.The number of degrees of freedom in estimating the population variance with the sample variance is equal to the sample size minus one

C. The number of degrees of freedom in estimating the population variance with the sample variance is equal to the sample size minus one because, in the formula for the sample variance, the quantity n - 1 is also known as the number of degrees of freedom in estimating the population variance, where n is the number of observations in the sample.

Which of the following is not generally considered one of the three key characteristics of Big Data? A. Variety B. Volume C. Visibility

C. Visibility because the term Big Data typically refers to datasets that have the following characteristics: Volume, Velocity, Variety, i.e., visibility is not one of the three characteristics.

Max Ohn, CFA, works as a client advisor for a small firm. He has established a referral program with a real estate agency. Ohn refers clients to the real estate agency and the real estate agency refers clients to Ohn. Because the real estate agency does not compete with Ohn's employer and because the arrangement benefits Ohn's firm, he omits disclosure of the arrangement to his firm. Ohn diligently discloses the referral arrangement to all referred clients after they become firm clients. Has Ohn most likely violated the Standard relating to referral fees? A. No B. Yes, only by omitting disclosure of the arrangement to his firm C. Yes, by omitting disclosure of the arrangement to his firm and by disclosing the referral arrangement to referred clients after they become firm clients

C. Yes, by omitting disclosure of the arrangement to his firm and by disclosing the referral arrangement to referred clients after they become firm clients

Nidhi Mehta, CFA, is a fund manager at XYZ Investments. Mehta's fund delivers excellent returns for the year. A large investor in the fund offers Mehta cash compensation along with free tickets to the opening night of a sold-out opera as a reward for the fund's performance. Firm policy requires employees to inform supervisors about monetary compensation received from clients. Mehta does not inform her supervisor as she only accepts the tickets and not the cash compensation. Has Mehta violated the Standards? A. No B. Yes, the Standard relating to fair dealing C. Yes, the Standard relating to additional compensation arrangements

C. Yes, the Standard relating to additional compensation arrangements because according to Standard IV(B), Additional Compensation Arrangements, members and Candidates must not accept gifts, benefits, compensation, or consideration that competes with or might reasonably be expected to create a conflict of interest with their employer's interest unless they obtain written consent from all parties involved. Mehta needs written consent prior from all parties to accepting the tickets.

Under US GAAP, for a long-term operating lease, the lessee reports: A. after inception, the lease payment split between financing and operating outflows on the statement of cash flows. B. at inception, a right-of use asset and a lease liability calculated as the undiscounted value of its fixed lease payments. C. after inception, a single lease expense each year, which is a straight-line allocation of the cost of the lease over its term.

C. after inception, a single lease expense each year, which is a straight-line allocation of the cost of the lease over its term. because under US GAAP, there are two accounting models for lessees: one for finance leases and another for operating leases. The finance lease accounting model is identical to the lessee accounting model for IFRS. The operating lease accounting model is different. The key difference between an operating lease and a finance lease is how the amortization of the ROU asset is calculated. For an operating lease, the lessee's ROU asset amortization expense is the lease payment minus the interest expense. The implication is that the total expense reported on the income statement (interest plus amortization) will equal the lease payment.

The correction of a material error for a prior period is handled by: A. adding a note disclosure regarding the error in the current financial statements only. B. restating the financial statements for the prior periods presented in the current financial statements only. C. both adding a note disclosure regarding the error in the current financial statements and restating the financial statements for the prior periods presented in the current financial statements.

C. both adding a note disclosure regarding the error in the current financial statements and restating the financial statements for the prior periods presented in the current financial statements. because another possible adjustment is a correction of an error for a prior period (e.g., in financial statements issued for an earlier year). This cannot be handled by simply adjusting the current period income statement. Correction of an error for a prior period is handled by restating the financial statements (including the balance sheet, statement of owners' equity, and cash flow statement) for the prior periods presented in the current financial statements. (IAS No. 8, Accounting Policies, Changes in Accounting Estimates and Errors, and FASB ASC Topic 250 [Accounting Changes and Error Corrections]) Note disclosures are required regarding the error.

When estimating the average return of an investment over multiple consecutive periods, it is most appropriate to use the: A. harmonic mean. B. arithmetic mean. C. geometric mean.

C. geometric mean. because if we want to estimate the average returns over more than one period, we should use the geometric mean of returns because the geometric mean captures how the total returns are linked over time.

Which pricing model combines multiple products so that customers are incentivized to buy them together? A. Bundling B. Tiered pricing C. Value-based pricing

A. Bundling because bundling refers to combining multiple products or services so that customers are incentivized or required to buy them together. Bundling can be effective, particularly for products that are complementary and that have high incremental profit margins and high marketing costs relative to the cost of the product itself.

Based on the information in the table, which of the following is closest to the geometric mean annual return for the full period of 5 years? *Year 1 Annual Return -8.00% *Year 2 Annual Return -5.5% *Year 3 Annual Return -7.2% *Year 4 Annual Return 20.8% *Year 5 Annual Return 4.4% A. 0.35% B. 0.90% C. 1.75%

A. 0.35% because the geometric mean annual return is computed multiplicatively as the nth root of the holding period. Square Root (1−8.0%)×(1−5.5%)×(1−7.2%)×(1+20.8%)×(1+4.

An analyst gathers the following information about a company: *Revenue = €20 million *Average shareholders' equity = €10 million *ROE = 10% *ROA = 4% The total asset turnover ratio is: A. 0.80 B. 1.25 C. 2.50

A. 0.80 because ROE = ROA × Leverage = Net profit margin × Total asset turnover × Leverage where: ROE = Net Income / Average shareholders' equity; ROA = Net Income / Average total assets; Leverage = Average total assets / Average shareholders' equity; Net profit margin = Net Income / Revenue Total asset turnover = Revenue / Average total assets. There are a number of options to solve this: Option 1: Net income = ROE × Average shareholders' equity = 10% × €10,000,000 = €1,000,000; Average total assets = Net Income / ROA = €1,000,000 / 4% = €25,000,000; Total asset turnover = Revenue / Average total assets = €20,000,000 / €25,000,000 = 0.80. Option 2: Net profit margin = Net Income / Revenue = €1,000,000 / €20,000,000 = 5%; Leverage = ROE / ROA = 10% / 4% = 2.50; ROE = Net profit margin × Total asset turnover × Leverage; thus Total asset turnover = ROE / (Net profit margin × Leverage) = 10% / (5% × 2.50) = 10% / 12.5% = 0.80. Option 3: Net profit margin = Net Income / Revenue = €1,000,000 / €20,000,000 = 5%; ROA = Net profit margin × Total asset turnover; thus Total asset turnover = ROA / Net profit margin = 4% / 5% = 0.80.

An analyst gathers the following information about a company: *Cash flow from operating activities (CFO) = 105.9 Canadian Dollars (millions) *Cash flow from investing activities = (11.8) Canadian Dollars (millions) *Cash flow from financing activities = 46.5 Canadian Dollars (millions) *Net change in cash for the year = 140.6 *Interest paid (included in CFO) = 22.4 *Taxes paid (tax rate of 30%) = 18.0 *Total debt, end of year = 512.8 Canadian Dollars (millions) The Cash flow debt coverage ratio for the year is closest to: A. 20.6% B. 23.7% C. 27.4%

A. 20.6% because cash flow debt coverage ratio = CFO/Total debt = 105.9/512.8 = 20.6%.

An analyst gathers the following informaiton about a company: *Debit to equity ratio based on market value = 43% Debt to equity ratio based on book value = 52% The weight of debt the analyst should use when determining the company's target capital structure is closest to: A. 30% B. 43% C. 52%

A. 30% because individuals outside the company, however, such as analysts, typically do not know the target capital structure and must estimate it using one of several methods. Assume the company's current capital structure, at market value weights for the components, represents the company's target capital structure. A simple way of transforming a debt-to-equity ratio (D/E) into a weight—that is, D/(D + E)—is to divide D/E by 1 + D/E. Thus the analyst should use 0.43 / (1 + 0.43) = 30.07% ~ 30% as the weight of debt in any estimate of the company's target capital structure.

An analyst gathers the following information about a company: *Book Value of debt = $80 million *Market Value of debt = $150 million *Share Price = $60 *Shares Outstanding = 10 million *Cost of Equity = 7% *Cost of debt = 4% *Tax Rate = 30% Based on this information, the company's WACC is closest to: A. 6.16% B. 6.40% C. 6.51%

A. 6.16% because one method to approximate the company's target capital structure is to assume the company's current capital structure, at market value weights for the components, represents the company's target capital structure. Market value of debt = $150 million Market value of equity = $60×10 million = $600 million Weight of debt, wd = $150 million/($150 million+$600 million) = 0.20 Weight of equity, we = $600 million/($150 million+$600 million) = 0.80 WACC = wdrd(1 - t) + wprp + were=(0.2)(4%)(1-30%)+0+(0.8)(7%) = 6.160% = 6.16% where wd = the target proportion of debt in the capital structure when the company raises new funds rd = the before-tax marginal cost of debt t = the company's marginal tax rate wp = the target proportion of preferred stock in the capital structure when the company raises new funds rp = the marginal cost of preferred stock we = the target proportion of common stock in the capital structure when the company raises new funds re = the marginal cost of common stock

According to the recommended procedures for compliance with the Standard relating to responsibilities of supervisors, a member in a supervisory position should: A. incorporate a professional conduct evaluation as part of an employee's performance review. B. rely on an employee's statement about the extent of a violation of the law if the employee gives written assurance that the wrongdoing will not reoccur. C. implement the CFA Institute Code and Standards in her department if she cannot discharge supervisory responsibilities because of inadequate compliance system.

A. A. incorporate a professional conduct evaluation as part of an employee's performance review. because according to the recommended procedures for compliance with Standard IV(C), Responsibilities of Supervisors, once a compliance program is in place, a supervisor should incorporate a professional conduct evaluation as part of an employee's performance review.

Assuming interest deductibility is allowed, an increase in the tax rate will cause a company's cost of capital to: A. decrease. B. remain the same. C. increase.

A. Decrease because if interest can be deducted in full, the tax deductibility of debt reduces the effective marginal cost of debt. Consequently, the cost of capital will decrease.

Which of the following is an example of a liquidity ratio? A. Defensive interval ratio B. Inventory turnover ratio C. Working capital turnover ratio

A. Defensive interval ratio because the defensive interval ratio measures how long the company can continue to pay its expenses from its existing liquid assets without receiving any additional cash inflow. A higher defensive interval ratio indicates greater liquidity.

A liquidity trap is most closely associated with: A. deflation. B. an inelastic demand for money. C. a positive nominal central bank policy rate.

A. Deflation because a liquidity trap arises when the demand for money is infinitely elastic because individuals elect to hold additional money balances rather than respond to stimulative rate cuts by spending. As a result, weakening consumption leads to deflation.

In the context of considering ESG factors, "stranded asset" risk most likely applies to companies in which sector? A. Energy B. Financial C. Industrial

A. Energy because stranded asset risk refers to carbon-intensive assets that are at risk of no longer being economically viable because of changes in regulation or investor sentiment and would most likely apply to the energy sector.

When analyzing differences between the variances of two normally distributed populations, the most appropriate test is a(n): A.F-test. B. chi-square test. C. paired comparisons test.

A. F-test. because an F-test is the appropriate test statistic concerning differences between the variances of the populations under these conditions.

A characteristic of a dollarized exchange regime is: A. imposed fiscal discipline. B. the ability to earn seigniorage profits. C. that monetary policy can be used as a source of economic stabilization.

A. Imposed fiscal discipline because dollarization imposes fiscal discipline by eliminating the possibility that the central bank will be induced to monetize government debt (i.e., to persistently purchase government debt with newly created local currency).

Which if the following is most likely a benefit of globalization? A. Increase profits B. Interdepence C. Stronger environmental, social, and governance standards

A. Increased profits because the opportunity to generate higher profits may motivate companies to globalize. The first way to generate profit is to increase sales. Companies may choose to engage in globalization in order to access new customers for their goods and services. Another way to increase profits is to reduce costs. Globalization allows companies to access lower tax-operating environments, reduce labor costs, or seek other supply chain efficiency gains.

Which of the following most accurately describes a distribution that is more peaked than normal? A. Leptokurtic B. Mesokurtic C. Platykurtic

A. Leptokurtic because a distribution that is more peaked than normal is called leptokurtic.

Costs incurred related to the search of alternative materials to use in a production process: A. must be expensed. B. must be capitalized. C. may be capitalized if certain criteria are met.

A. Must be expensed because IFRS require that expenditures on research (or during the research phase of an internal project) be expensed rather than capitalized as an intangible asset. Research is defined as original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. The research phase of an internal project refers to the period during which a company cannot demonstrate that an intangible asset is being created—for example, the search for alternative materials or systems to use in a production process.

Kathy Lau, CFA, is a portfolio manager. After a comprehensive analysis, Lau buys Top Technology Company (TTC) IPO for all her clients for whom the investment is appropriate, including her brother's fee-paying account. Lau does not have beneficial ownership in her brother's account. Has Lau violated the Standards by buying shares for her brother's account? A. No B. Yes, the Standard relating to disclosure of conflicts C. Yes, the Standard relating to priority of transactions

A. No because according to Standard VI(B), Priority of Transactions, family accounts that are client accounts should be treated like any other firm account and should neither be given special treatment nor be disadvantaged because of the family relationship. In addition, according to Standard VI(A), Disclosure of Conflicts, members and candidates must make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employer. Members and candidates must ensure that such disclosures are prominent, are delivered in plain language, and communicate the relevant information effectively. Lau should treat her brother's account fee-paying like any other firm account. Therefore, Lau has not violated to Standard VI(B) and Standard VI(A).

Ming Mei Xu, CFA, who is a well-known analyst issues a buy recommendation on a small-cap stock. Xu shares her recommendation with the public two days after communicating the recommendation with her clients. The public dissemination leads to a significant increase in the stock price. Trevor Thomas, CFA, one of Xu's clients, buys a large position in the stock. Thomas sells the entire position for a profit a month later. His action leads to a significant decline in the stock price. Has the Standard relating to market manipulation been violated? A. No B. Yes, by Xu C. Yes, by Thomas

A. No because market manipulation includes (1) the dissemination of false or misleading information and (2) transactions that deceive or would be likely to mislead market participants by distorting the price-setting mechanism of financial instruments. The intent of the action is critical to determining whether it is a violation of this standard. In this case, Xu did not have the intent to mislead anyone by publishing the buy recommendation and Thomas undertook a legitimate transaction resulting in a profit but that transaction did also not intend to distort the price-setting mechanism. Therefore, both members have complied with the Standard relating to market manipulation.

Which of the following are among the recommended procedures that enable members to meet their obligations under the Standard relating to performance presentation? Procedure 1: Members should include terminated accounts while presenting performance history. Procedure 2: Members should use a single representative account to present the performance of each investment strategy. A. Procedure 1 only B. Procedure 2 only C. Both Procedure 1 and Procedure 2

A. Procedure 1 because members and candidates can also meet their obligations under Standard III(D), Performance Presentation, by including terminated accounts as part of performance history with a clear indication of when the accounts were terminated. Terminated accounts should be included in the performance presentation.

Companies most likely have the largest proportion of equity in their capital structure in the: A. start-up stage. B. growth stage. C. maturity stage.

A. Start-up stage because companies in the growth stage have a "Rising" "Debt Availability", while mature companies have a "High" "Debt Availability." By contrast, startup companies have a "Little or None" "Debt Availability". Thus, a startup company has most the smallest amount of debt (if any) in its capital structure compared to a growth or mature company. This means that the equity portion in the capital structure for startups is higher than for growth or mature companies.

In a client presentation regarding a potential equity investment, a member makes the following statements: Statement 1: "This investment will outperform the S&P 500 over a ten-year period." Statement 2: "This investment is likely to outperform the market over a one-year period." Statement 3: "With this product's 100% principal protection, our firm guarantees you will not lose money." The member has most likely violated the Standards by making: A. Statement 1 only B. Statement 1 and Statement 3 only C. Statement 1, Statement 2, and Statement 3

A. Statement 1 only Correct because according to Standard I (C), Misrepresentation, members and candidates are prohibited from guaranteeing clients any specific return on volatile investments. So Statement 1 is a violation of the Standard. Statement 3 does not violate the Standards because Standard I(C) does not prohibit members and candidates from providing clients with information on investment products that have guarantees built into the structure of the products themselves or for which an institution has agreed to cover any losses. Statement 2 does not violate the Standards because Standard I(C) prohibits members and candidates from guaranteeing clients any specific return on volatile investments. It does not prohibit statements regarding probable returns.

Joyce La Valle, CFA, is a portfolio manager at a global bank. La Valle has been told she should use a specific vendor for equity investment research that has been approved by the bank's headquarters. Because La Valle is located in a country different from the bank's headquarters, she is uncomfortable with the validity of the research provided by this vendor when it applies to her country and would like to use a local vendor on whom she has already conducted due diligence. Which research vendor(s) should La Valle use to avoid violating the Standards? A. The local research vendor B. The bank-approved research vendor C. Both the local and the bank-approved research vendors.

A. The local research vendor because when a member has reason to suspect that either secondary or third-party research or information comes from a source that lacks a sound basis, the member must not rely on that information as required by Standard V(A), Diligence and Reasonable Basis.

An analyst gathers the following information about a company's fiscal year beginning on 1 January: *Net income = £1,800,000 *Preferred dividends declared and paid = £600,000 *Common shares outstanding on 31 December = 300,000 *Weighted average common shares outstanding during the year = 500,000 *Convertible preferred shares outstanding during the year = 25,000 If one preferred share can be converted into four common shares and there are no other potentially dilutive securities outstanding, reported diluted EPS should be: A. £2.40. B. £3.00. C. £4.00.

A. £2.40. because reported diluted EPS is equal to basic EPS as the convertible security is antidilutive (i.e. their inclusion would result in an EPS higher than the company's basic EPS). Under IFRS and US GAAP, antidilutive securities are not included in the calculation of reported diluted EPS. Reported diluted EPS will always be less than or equal to basic EPS. Reported diluted EPS is calculated using the if-converted method. The if-converted method is based on what EPS would have been if the convertible preferred securities had been converted at the beginning of the period.Diluted EPS using the if-converted method for preferred stock is Net income/ (Weighted average number of shares outstanding + New common shares that would have been issued at conversion); or = £1,800,000 / [500,000 + (25,000 × 4)] = £1,800,000 / 600,000 = £3.00. Basic EPS = (Net income - Preferred dividends)/ Weighted average number of shares outstanding = (£1,800,000 - £600,000) / 500,000 = £1,200,000 / 500,000 = £2.40.As Basic EPS of £2.40 is lower than the diluted EPS of £3.00, the convertible preferred stock is antidilutive, the reported dilutive EPS should thus be equal to basic EPS of £2.40.

Jacques Lagarde, CFA, is a sell-side analyst at Springhill Financial, a small investment bank. Springhill is the lead manager for the equity offering of Chorale Music. Lagarde is not part of the IPO team for this offering. While finalizing a research report on Chorale, Lagarde discovers inconsistencies that makes him believe the company may have concealed losses in its leasing division last quarter that would significantly reduce its earnings. Lagarde suspects that Springhill's investment banking team is aware of these unreported losses. The prospectus for Chorale's equity offering has already been approved by regulators and distributed to potential investors. According to the Standards, Lagarde should most likely: A.report the issue to his supervisor. B. issue a report showing the leasing division losses. C. issue the report using data as reported in the prospectus.

A.) report the issue to his supervisor because Lagarde has potentially uncovered material omissions that would impact Chorale's IPO, and, according to Standard I(A), Knowledge of the Law, the most appropriate first step would be to report this issue to his supervisor. This issue should be investigated more fully. If the losses are confirmed, Lagarde should insist that these losses be made public.

An analyst gathers the following information: *CHF/USD spot exchange rate = 1.0072 *270-day CHF risk-free interest rate (annualized) 0.63% *270-day USD risk-free interest rate (annualize) = 0.75% the number of forward points for the 270 day CHF/USD forward rate is closest A. -12.0 B. -9.0 C. 0.5

B. -9.0 because the forward rate is calculated as CHF/USD forward rate = CHF/USD spot rate × [1 + (CHF rate × 270/360)] / [1 + (USD rate × 270/360)] = 1.0072 × 1.004725 / 1.005625 = 1.0072 × 0.999105 = 1.0063. The forward points are calculated as 1.0063 - 1.0072 = -0.00090 or -9.0 points (multiply by 10,000).

Colin Gifford, CFA, is finalizing a monthly newsletter to his clients, who are primarily individual investors. Many of the clients' accounts hold the common stock of Capricorn Technologies. In the newsletter, Gifford writes, "Based upon the next six month's earnings of $1.50 per share and a 10% increase in the dividend, the price of Capricorn's stock will be $22 per share by the end of the year." Regarding his stock analysis, the least appropriate action Gifford should take to avoid violating the Standards would be to: A. separate fact from opinion. B. include earnings estimates. C. identify limitations of the analysis.

B. Include earnings estimates because while pro forma analysis may be standard industry practice, it is not required by the Standards. Earnings estimates are opinions and must be clearly identified as such.

Which of the following is best described as a non-cooperative economic tool? A. Globalization B. Nationalization C. Restriction of foreign investment

B. Nationalization because economic tools can also be non-cooperative in nature. Nationalization, the process of transferring an activity or industry from private to state control, is a non-cooperative approach to asserting economic control.

The following table represents the history of an investment in a company: ((*TIME)) Beginning of Year 1 *Activity Purchase 10 shares *PRICE PER SHARE E 160 *DIVIDENDS PAID PER SHARE ---- ((*Time)) END OF YEAR 1 *ACTIVITY PURCHASES 5 Shares *PRICE PER SHARE E 168 *DIVIDENDS PAID PER SHARE E3.00 ((*TIME)) END OF YEAR 2 *ACTIVITY ------- *PRICE PER SHARE E175 *DIVIDENDS PAID PER SHARE E4.00 ((TIME)) END OF YEAR 3 *ACTIVITY Sell 15 shares *PRICE PER SHARE E165 *DIVIDENDS PAID PER SHARE E0.00 The investor does not reinvest the dividends received. Ignoring taxes, the time-weighted rate of return on this investment is closest to: A. 1.93% B. 2.40% C. 2.57%

B. 2.40% because the portfolio value at the beginning and end of each period and the dividends received over the three years are calculated as follows: ((*Beginning Value:)) "Year 1" -- 10 xE160 = E1,600 "Year 2" -- 15 x E168 =E2,520 "Year 3" -- 15 x E175 = E2,625 ((*Ending Value:)) "Year 1" --10 x E168= E1,680 "Year 2" --15 x E175= E2,625 "Year 3" -- 15x E165 = E2,475 ((*Dividend Received)) "Year 1" 10 x E3.00 = E30 "Year 2" 15 x E4.00 =E60 "Year 3" 15 x E0.00 The holding period return (HPR) for the three years is calculated as follows: HPR = (Pt+1 − Pt + Dt+1)/Pt HPRYear 1 = (€1,680 − €1,600 + €30)/€1,600 = 6.88% HPRYear 2 = (€2,625 − €2,520 + €60)/€2,520 = 6.55% HPRYear 3 = (€2,475 − €2,625)/€2,625 = −5.71% The time-weighted return (TWR) is found by taking the geometric mean of the three holding period returns: TWR = [(1 + HPRYear 1) × (1 + HPRYear 2) × (1 + HPRYear 3)]1/3 − 1 TWR = [(1 + 6.88%) × (1 + 6.55%) × (1 − 5.71%)]1/3 − 1 = 1.07381/3 − 1 = 2.40% Alternatively: TWR = {[(€168 + €3)/€160] × [(€175 + €4)/€168] × (€165/€175)}1/3 − 1 = (1.0688 × 1.0655 × 0.9429)1/3 − 1 = 2.40%.

An analyst gathers the following information (in € thousands) about a machine: *Carrying Amount Prior To Impairment = 50 *Present Value of Expected Future Cash Flows = 46 *Fair Value = 48 *Costs to Sell = 3 Impairment loss (in € thousands) is: A. 2 B. 4 C. 5

B. 4 because under IAS 36, an impairment loss is measured as the excess of carrying amount over the recoverable amount of the asset. The recoverable amount of an asset is defined as the higher of its fair value less costs to sell and its value in use. Value in use is based on the present value of expected future cash flows. Accordingly, Impairment loss = Carry amount - Max[(Fair value - Costs to sell), Present value of expected future cash flows] = 50 - Max[(48 - 3), 46] = 50 - 46 = 4.

An analyst gathers the following information (in E millions) from a company's year-end balance sheet: YEAR 2 *Accounts receivable: 65 Inventory: 120 PP&E: 1,400 Accumulated Depreciation : 120 Accounts Payabale: 25 YEAR 1 *Accounts Receivable: 55 *Inventory: 140 *PP&E: 1,400 *Accumulated Depreciation: 80 *Accounts Payable: 40 During Year 2, net income was $860 million. There were no acquisition or sales of property, plant, and equipment and no write-downs. Cash flows from operation activities (in E millions) for Year 2 is: A. 855 B. 895 C. 925

B. 895 because using the indirect method, operating cash flow is calculated as net income + depreciation expense - increase in current operating asset accounts (accounts receivable) + decrease in current operating asset account (inventory) - decrease in current operating liability accounts (accounts payable) = 860 + 40 - 10 + 20 - 15 = 895.

Which of the following statements is most accurate? A. Deferred tax assets occur when the tax base of an asset is lower than its carrying amount B. A company's current tax liability is the amount payable in taxes and is based on current taxable income C. Deferred tax liabilities occur when regulatory income tax expense is greater than accounting income tax expense

B. A company's current tax liability is the amount payable in taxes and is based on current taxable income because a company's taxable income is the basis for its income tax payable (a liability) or recoverable (an asset), which appears on its balance sheet.

A company acquires 100% of a target company for a purchase price of $4.5 million. The net identifiable assets of the target company have a fair value of $5 million. In the period the acquisition occurs, the acquiring company most likely reports: A. goodwill of $0.5 million. B. a pretax gain of $0.5 million in profit and loss. C. a pretax gain of $0.5 million in other comprehensive income.

B. A pretax gain of $0.5 million in profit and loss because when the fair value of the assets exceeds the purchase price, it is a bargain purchase, and is recognized the profit and loss in the period it occurs. When a transaction involves the purchase of net identifiable assets with a value greater than the cost to purchase,it is called a bargain purchase. Any gain from a bargain purchase is recognized in profit and loss in the period in which it arises.

To comply with the Standard relating to knowledge of the law, members are required to take which of the following actions? Action 1: Acquire detailed knowledge of all the laws relating to their activities Action 2: Dissociate from activities of others that they believe are unethical A. Action 1 only B. Action 2 only C. Both Action 1 and Action 2

B. Action 2 only because according to Standard I(A), Knowledge of the Law, if a member or candidate has reasonable grounds to believe that imminent or ongoing client or employer activities are illegal or unethical, the member or candidate must dissociate, or separate, from the activity. So, members are required to take Action 2.

In contrast to US GAAP, cash flow statements prepared under IFRS: A. are less flexible regarding the classification of dividends paid or received. B. allow interest receipts to be classified as either operating or investing cash flows. C. require adherence to the direct method format when reporting operating activities.

B. Allow interest receipts to be classified as either operating ro investing cash flows. because IFRS allows interest receipts to be classified as either operating or investing activities whereas US GAAP requires interest receipts to be classified only as operating cash flows.

Bootstrap resampling: A. repeatedly draws samples without replacement. B. can be used to estimate the standard error of a population median. C. relies on an analytical formula to estimate the distribution of estimators.

B. Can be used to estimate the standard error of a population media because bootstrap, one of the most popular resampling methods, can be used to find the standard error or construct confidence intervals for the statistic of other population parameters, such as the median.

Which of the following policy recommendations is consistent with the Standards? *Recommendation 1: Investment banking personnel should approve any changes in investment recommendations from the research side. *Recommendation 2: Firewalls should separate reporting structures for personnel on the research side and personnel on the investment banking side. *Recommendation 3: Compensation arrangements should link research analyst remuneration directly to investment banking assignments in which analysts may participate as team members. A. Recommendation 1 B. Recommendation 2 C. Recommendation 3

B. Recommendation 2 because according to Standard I (B), Independence and Objectivity, members, candidates, and their firms must adopt and follow perceived best practices in maintaining independence and objectivity in the corporate culture and protecting analysts from undue pressure by their investment banking colleagues. The firewalls traditionally built between these two functions must be managed to minimize conflicts of interest; indeed, enhanced firewall policies may go as far as prohibiting all communications between these groups. A key element of an enhanced firewall is separate reporting structures for personnel on the research side and personnel on the investment banking side.

Tharushi Ranasinghe, CFA, is president of a small investment firm. Most of her clients are longtime associates or family members whose investment portfolios she has managed for many years. Ranasinghe is familiar with her clients' investment profiles and is in regular contact with them. Ranasinghe makes appropriate adjustment in her clients' portfolios following significant events in their lives. She rarely updates her clients' records given her familiarity with their investment requirements. Ranasinghe has most likely violated the Standard(s) relating to: A. fair dealing only. B. record retention only. C. both fair dealing and record retention.

B. Record retention only because Standard V(C), Record Retention states, Members and Candidates must develop and maintain appropriate records to support their investment analyses, recommendations, actions, and other investment-related communications with clients and prospective clients. In this case, Ranasinghe has a responsibility as her clients' adviser and as the president of her company to maintain appropriate records when client circumstances change. Without necessary, relevant, and up-to-date know-your-client information, Ranasinghe would have difficulty establishing and proving that her firm has identified the needs and circumstances of its clients and has taken them into account in recommending investments. So, Ranasinghe has violated this Standard.

Which of the following fiscal policy tools is an automatic stabilizer? A. Capital expenditures B. Social benefits through transfer payments C. Current government spending on goods and services

B. Social benefits through transfer payments because automatic stabilizers will lead to changes in the budget deficit unrelated to fiscal policy changes. Automatic stabilizers—such as income tax, VAT, and social benefits—are important because as output and employment fall and reduce tax revenues, so net tax revenues also fall as unemployment benefits rise. This acts as a fiscal stimulus and serves to reduce the size of the multiplier, dampening the output response of whatever caused the fall in output in the first place. Transfer payments are welfare payments made through the social security system and, depending on the country, comprise payments for state pensions, housing benefits, tax credits and income support for poorer families, child benefits, unemployment benefits, and job search allowances.

Which of the following is consistent with the Standards? Statement 1: "An IPS should address the client's return requirements." Statement 2: "Personal data such as age and occupation are required to provide investment advice." Statement 3: "Clients are primarily responsible for determining if investments are suitable for them if they are in an advisory relationship with members." A. Statement 1 only B. Statement 1 and Statement 2 only C. Statement 1, Statement 2, and Statement 3

B. Statement 1 and Statement 2 only Correct because Statement 1 and Statement 2 are consistent with the Standards. Statement 1 is consistent because according to Standard III(C), Suitability, this information should be incorporated into a written investment policy statement (IPS) that addresses the client's return requirements. Statement 2 is consistent because according to Standard III(C), Suitability, when an advisory relationship exists, members and candidates must gather client information at the inception of the relationship. Such information includes the client's financial circumstances, personal data (such as age and occupation) that are relevant to investment decisions, attitudes toward risk, and objectives in investing.

Frank Schneider, CFA, a securities analyst, applies for a new position. In his application, he makes two statements: Statement 1: I passed all three CFA examinations in three consecutive attempts. Statement 2: Based on my success in the CFA Program, I have a superior ability to analyze stocks compared to my peers. Schneider has most likely violated the Standards by making: A. Statement 1 only B. Statement 2 only C. Both Statement 1 and Statement 2

B. Statement 2 only because Statement 2 links passing the three examinations on the first try with superior ability, which is a violation of Standard VII(B), Reference to CFA Institute, the CFA Designation, and the CFA Program. Members may state that they passed the three examinations on their first try as long as this statement is true, but it must not be linked to performance or imply superior ability.

When a company's payables turnover ratio is lower compared to its peers, the company is most likely: A. utilizing early payment discounts. B. taking advantage of lenient supplier terms. C. receiving payments from customers faster than its peers.

B. Taking advantage of lenient supplier terms because an excessively low turnover ratio (high days payable) could indicate trouble making payments on time, or alternatively, exploitation of lenient supplier terms.

All clients of John Chapman, CFA, are standard fee-paying clients. Chapman believes that half of his clients would benefit from premium service in exchange for higher fees. He offers the premium service only to these clients. Later that day, Chapman distributes an investment recommendation only to those clients for whom he deems it suitable. Has Chapman violated the Standard relating to fair dealing? A. No B. Yes, by offering the premium service only to clients he believes would benefit from it C. Yes, by distributing an investment recommendation only to those clients for whom he deems it suitable

B. Yes, by offering the premium service only to clients he believes would benefit from it because according to Standard III(B), Fair Dealing, the different service levels should be disclosed to clients and prospective clients and should be available to everyone (i.e., different service levels should not be offered selectively). By offering the premium service only to those clients he believes may want them, rather than to all clients, Chapman violates the Standard.

Naib, CFA, ask by his employer to submit an updated document providing the history of his employment & skills. The existing document on file was submitted when he was hired 5 years ago. His employer notices updated version shows that Naib obtained his (MBA) 2 years ago, the earlier version he already obtained his MBA. As the position Naib hired for required an MBA, Naib is asked to explain the discrepancy. He justifies his actions, "I knew you wouldn't hire me if I didn't have an MBA degree, I already had my CFA designation. Knowing you required an MBA, I went back to school after I was hired to obtain it. I graduated top of my class, but shouldn't come as surprise, u seen my CFA exams on the first attempt." Did Naib most likely violate the Standards? A. No B. Yes, the Standard relating to misconduct C. Yes, the Standard relating to reference to CFA Institute, the CFA Designation, and the CFA Program

B. Yes, the Standard relating to misconduct Correct because Naib knowingly misrepresented his qualifications by stating he had obtained an MBA degree at the time of his hire when in fact he had not. This reflects adversely on his professional integrity, violating Standard I(D), Misconduct. Stating that he passed his CFA exams in three consecutive years is not a violation of Standard VII(B), Reference to CFA Institute, the CFA Designation, and the CFA Program, if it is factual. There is no evidence given to indicate he did not pass as claimed.

A well-defined supply function is most likely available to: A. a monopolist. B. a firm operating in perfect competition. C. a firm operating in monopolistic competition.

B. a firm operating in perfect competition. because in perfect competition, the firm's supply schedule is represented by the marginal cost schedule.

A write-down of inventory to its net realizable value by a manufacturing company most likely results in a lower: A. cost of sales than if the write-down had not occurred. B. current ratio than if the write-down had not occurred. C. inventory turnover than if the write-down had not occurred.

B. current ratio than if the write-down had not occured because an inventory write-down reduces both profit and the carrying amount of inventory on the balance sheet and thus has a negative effect on profitability, liquidity, and solvency ratios. Major liquidity ratios include the current ratio. The Current ratio, being Current assets ÷ Current liabilities is lower because the numerator (Current assets) is lower due to lower carrying amount of inventories as a result of the write-down while the denominator (Current liabilities) remains unchanged.

Asset owners most likely benefit from a firm being GIPS compliant because it: A. eliminates the need for in-depth due diligence only. B. facilitates the understanding of the sources of risk and excess return only. C. both eliminates the need for in-depth due diligence and facilitates the understanding of the sources of risk and excess return.

B. facilitates the understanding of the sources of risk and excess return only. because, where asset owners require their external managers to comply with the GIPS standards, reporting to the oversight body using the same principles facilitates the understanding of the sources of risk and excess return in the funds under supervision. Asset owners provide performance information to their oversight bodies that allows them to make investment decisions and evaluate the performance of the funds under their supervision.

All else being equal, in periods of decreasing inventory unit costs and constant inventory quantities, using the FIFO inventory valuation method results in: A. lower gross profit and lower inventory turnover than using the LIFO inventory valuation method. B. lower gross profit and higher inventory turnover than using the LIFO inventory valuation method. C. higher gross profit and higher inventory turnover than using the LIFO inventory valuation method.

B. lower gross profit and higher inventory turnover than using the LIFO inventory valuation method. because using FIFO in periods of declining prices, the costs assigned to the units in ending inventory are lower than the costs assigned to the units sold. Conversely, [using LIFO] in periods of declining prices, the costs assigned to the units in ending inventory are higher than the costs assigned to the units sold. Therefore, when using FIFO, cost of goods sold will be higher than using LIFO, and accordingly, gross profit (revenue cost of goods sold) will be lower. Inventory turnover ratio = Cost of goods sold / Average inventory, as the numerator is higher and denominator lower, the inventory turnover ratio using FIFO will be higher than using LIFO.

Substantial government borrowing is less likely to be of concern when: A. the private sector decreases savings to offset the debt. B. most of the borrowing is owed internally to local citizens. C. the private sector is crowded out to make room for the debt.

B. most of the borrowing is owed internally to local citizens. because the issue of significant debt may be overstated because the debt is owed internally to fellow citizens.

According to the Standard relating to loyalty, members must: A. subordinate any personal obligations to their work. B. place the interests of their employer below the interests of clients. C. refrain from entering into an independent business while still employed.

B. place the interests of their employer below the interests of clients. because according to Standard IV (A), Loyalty, members and candidates must always place the interests of clients above the interests of their employer.

The continuously compounded return: A. is higher than the holding period return for a given time period. B. for multiple time periods is the sum of the one-period continuously compounded returns. C. cannot be calculated for negative holding period returns because the natural logarithm of a negative number is not a real number.

B.for multiple time periods is the sum of the one-period continuously compounded returns. because the continuously compounded return to time T is the sum of the one-period continuously compounded returns.

Which of the following statements is most accurate? According to Modigliani-Miller Proposition I without taxes: A. firm value can be created by changing a company's capital structure. B. any increase in the cost of equity must exactly offset the greater use of lower cost debt. C. equity holders demand a higher return as leverage increases in order to offset increased risk

C. Equity holders demand a higher return as leverage increases in order to offset increased risk. because MM Proposition I without taxes states: The market value of a company is not affected by the capital structure of the company. It demonstrates that managers cannot create firm value simply by changing the company's capital structure. In other words, the value of a company is determined solely by its cash flows, not by its relative reliance on debt and equity capital. Adding leverage increases the risk to equity holders because greater debt increases the probability of bankruptcy. As a result, equity holders will demand a higher return as leverage increases in order to offset the increase in risk. However, overall cost of capital does not change, so there is no change in the value of the company

An option in a capital project to alter production when demand exceeds supply is a type of: A. sizing option. B. timing option. C. flexibility option.

C. Flexibility option because a production-flexibility option is a type of flexibility option. Production-flexibility options offer the operational flexibility to alter production when demand varies from what is forecast.

Question If a company's receivables turnover ratio is equal to its payables turnover ratio, the company's cash conversion cycle is equal to its number of days of: A. payables. B. sales outstanding. C. inventory on hand.

C. Inventory on hand because a company with the same value for receivables turnover and payables turnover has the same number of days sales outstanding (DSO) as the number of days of payables; therefore, the company's cash conversion cycle would equal the days of inventory on hand (DOH). That is, as a company's cash conversion cycle is equal to DOH + DSO - Number of days of payables when a company's DSO is equal to the number of days of payables, the company's cash conversion cycle is equal to its DOH.

A member who pays a higher brokerage commission on behalf of all of his clients than he would normally pay, without any corresponding benefit to the client, violates the Standard relating to: A. suitability. B. fair dealing. C. loyalty, prudence, and care.

C. Loyalty, prudence, and care. because according to Standard III(A), Loyalty, Prudence, and Care, a member or candidate who pays a higher brokerage commission than he or she would normally pay to allow for the purchase of goods or services, without corresponding benefit to the client, violates the duty of loyalty to the client.

Which of the following tools is available to implement monetary policy? A. Indirect tax rates B. Corporate tax rates C. Open market operations

C. Open market operations because central banks have three primary tools available to them: open market operations, the refinancing rate, and reserve requirements.

An analyst gathers the following information about three portfolios: *Portfolio 1 --Return: 8.0% ~Standard Deviation: 6.0% *Portfolio 2 --Return: 10.2% ~Standard Deviation: 8.0% *Portfolio 3 --Return: 11.8% ~Standard Deviation: 10.0% If the risk-free rate is 2.0% and the shortfall level is 4.0%, the portfolio with the highest safety-first ratio is: A. Portfolio 1. B. Portfolio 2. C. Portfolio 3.

C. Portfolio 3 because the safety-first ratio (SFRatio): SFRatio = [E(RP) − RL]/σP. Hence, Portfolio 3 has the highest SFRatio: SFRatio = (11.8 - 4.0)/10.0 = 0.780. The SFRatio for Portfolio 1 is (8.0 - 4.0)/6.0 = 0.667. The SFRatio for Portfolio 2 is (10.2 - 4.0)/8.0 = 0.775.

Which of the following statements is most accurate? The role of financial reporting is to: A. forecast future net income and cash flow. B. value a security for making investment decisions. C. provide information about a company's performance, financial position, and changes in financial position.

C. Provide information about a company's performance, financial position, and changes in financial position because the role of financial statements issued by companies is to provide information about a company's performance, financial position, and changes in financial position that is useful to a wide range of users in making economic decisions.

In simple linear regression models, the normality assumption requires that the: A. dependent variable is normally distributed. B. independent variable is normally distributed. C. regression residuals are normally distributed.

C. Regression residuals are normally distributed because we need to make the assumption that regression residuals are normally distributed to be able to draw valid conclusions from a simple linear regression model

Which of the following best describes a principal-agent conflict? A company's management puts their own interests above those of: A. regulators. B. customers. C. shareholders.

C. Shareholders because a principal-agent relationship (also known as an agency relationship) is created when a principal hires an agent to perform a particular task or service. The principal-agent relationship involves obligations, trust, and expectations of loyalty; the agentis expected to act in the best interests of the principal. In a company, agency theorystipulates that principal-agent relationships often lead to conflicts—for example, whenmanagers do not act in the best interests of shareholders. Managers must act in the best interest of shareholders. While there may be a duty to multiple stakeholders, this specifically describes the principal-agency conflict.

Which of the following statements is most accurate? Statement 1: The IRR assumes reinvestment of cash flows at the required rate of return. Statement 2: IRR is strongly preferred when NPV and IRR rank two mutually exclusive projects differently. Statement 3: NPV is zero when IRR equals the hurdle rate. A. Statement 1 B. Statement 2 C. Statement 3

C. Statement 3 because the required rate of return is often called the hurdle rate, the rate that a project's IRR must exceed for the project to be accepted by the company. In the unlikely event that the IRR is equal to r, the project is theoretically acceptable because it meets the required return. In fact, NPV equals zero when IRR equals r.

In contrast to the Herfindahl-Hirschman index (HHI), the concentration ratio: A. considers the elasticity of demand. B. accounts for the possibility of new entrants. C. is less affected by mergers among the top market incumbents.

C. is less affected by mergers among the top market incumbents because another disadvantage of the concentration ratio is that it tends to be unaffected by mergers among the top market incumbents. For example, if the largest and second-largest incumbents merge, the pricing power of the combined entity is likely to be larger than that of the two pre-existing companies. But the concentration ratio may not change much. To avoid the known issues with concentration ratios, economists O.C. Herfindahl and A.O. Hirschman suggested an index where the market shares of the top N companies are first squared and then added. The HHI for the top three companies in the example in the box above would be 0.352 + 0.252 + 0.202 = 0.225 before the merger, while after the merger, it would be 0.602 + 0.202 + 0.102 = 0.410, which is substantially higher than the initial 0.225. The HHI is widely used by competition regulators.

Ensuring that the composition of a board of directors is aligned with a company's governance principles is most likely a responsibility of the: A. risk committee. B. audit committee. C. nominating committee.

C. nominating committee. Correct because the nomination committee can help ensure that the board's composition is well balanced and aligned with the company's governance principles.

Using long-term debt or equity to finance working capital needs most likely: A. reduces the cost of financing working capital. B. provides the opportunity to borrow only as needed. C. reduces the need to access capital markets in times of stress.

C. reduces the need to access capital markets in times of stress. because a conservative approach to working capital management involve greater reliance on long-term funding sources, including long-term debt and equity. Further, a conservative working capital strategy reduces the need to access capital during times of market stress.

The Standards are most likely designed to foster and reinforce a culture of: A. service to the firm. B. regulatory compliance. C. responsibility and professionalism.

C. responsibility and professionalism. because the Standards are designed to foster and reinforce a culture of responsibility and professionalism. They apply to all members and candidates regardless of title, position, occupation, geographic location, or specific situation, and they apply to all professional activities of investment professionals.

A company plans to do an upward revaluation of an asset under the revaluation model. All else being equal, the company's debt-to-assets ratio will: A. decrease. B. remain unchanged. C. increase.

a. Decrease because an upward revaluation will increase the value of assets, which is the denominator of the debt-to-assets ratio. Debt is not affected by the upward revaluation. The ratio will decrease.