Let's pass this test...
Characteristics of an inferior good.
1. An inferior good is something that a consumer would demand less of if they had a higher level of income 2. The income elasticity of inferior goods is negative
Three charateristics of derivatives are...
1. Derivatives are priced assuming that the investors are risk neutral 2. The expected payoff of the derivative is discounted using the risk-free rate of return. 3. Derivatives' prices should be such that the difference between the payoff of the underlying and the payoff of a derivative is equal to the risk free rate of return
Other comprehensive income includes which 4 components?
1. Foreign currency translation gains and losses 2. Adjustments for minimum pension liability 3. Unrealized gains and losses from cash flow hedging derivatives 4. Unrealized gains and losses for available for sale securities
CAPM Assumptions include:
1. Infinitely divisible assets 2. Risk-Aversion 3. Utility Maximization 4. Rational Individuals 5. Frictionless markets 6. Single holding period 7. Homogeneous expectations 8. Infinitely divisible assets 9. Price Takers
What are the three reasons why the bank discount yield is not a meaningful measure of investors' return?
1. It is based on the face value of the bond, not on its purchase price 2. It is annualized based on a 360-day year rather than a 365 day year 3. It annualizes with simple interest, ignoring the opportunity to earn interest on interest
What are the 3 characteristics of a lognormal distribution?
1. Its farthest point on the left side is bounded by 0. 2. The probability distribution function starts at 0, increases to its mode, and decreases thereafter 3. It is skewed to the right...positively skewed
For mutually exclusive projects NPV and IRR may offer conflicting decisions. These two scenarios are:
1. When the projects' initial cash outlays are different 2. When the timing of the projects' cash flow differs
Coverage ratios in credit analysis refer to the:
Ability of the issuer to make its interest payments.
In credit analysis, the capacity of the issuer refers to the:
Ability of the issuer to service its debt.
The objective of tactical asset allocation is to:
Add value to the strategic asset allocation by taking advantage of short-term mispricing of asset classes
What is Standard IV(B)?
Additional compensation arrangements
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
A sinking fund arrangement is...
Bonds retired annually are designated by a random drawing.
The strategy that works best under an assumption of a noninformationally efficient market is:
An active strategy
Common-size statements are an input for which steps in the financial statement analysis framework?
Analyzing data...common size statements are an output of the processing-data phase in the financial statement analysis framework and are used to analyze data.
A qualified accountant's report indicates that the financial statements:
Are not prepared completely in accordance with accounting standards
Accounting Equation 1b
Assets - Liabilities = Owners' Equity
Accounting Equation 5a
Assets = Liabilities + Contributed Capital + Retained Earnings
Accounting Equation 5b
Assets = Liabilities + Contributed capital + Beginning Retained Earnings + Revenue - Expenses - Dividends
Accounting Equation 1a
Assets = Liabilities + Owners' Equity
Financial leverage ratio equals
Average total assets divided by average total equity
Cash paid to suppliers equals
COGS + Change in inventory - Change in Accounts Receivable
Inventory turnover ratio equals...
COGS divided by Average Inventory
Price discrimination targets to exploit the maximum of:
Consumer surplus
Under IFRS what are the models used to value investment property?
Cost model or fair value model
What type of asset is a deferred tax assets?
Current Asset
Free cash flow to the firm equals....
Cash flow from operations + Interest (1- tax rate) - fixed investment
When we are using a hypothesis test to test the variance of a single normally distributed population we should us the...
Ch square test
What is Standard V(B)?
Communication with Clients and Prospective Clients
What are the four enhancing qualitative characteristics in the Conceptual Framework for Financial Reporting (2010)?
Comparability, timeliness, verifiability, and understandability.
The Monte Carlo simulation furnishes the decision maker with a range of possible outcomes and the probabilities they will occur for any choice of action
Compared to historical simulation, Monte Carlo simulation can be used to model based on parameters that are not limited to past experience
A financial reporting framework has principles universal enough to guide prepares dealing with new and existing transactions.....this framework most likely exhibits what characteristic found in a coherent framework?
Comprehensiveness
What is Standard VI(A)
Conflict of interest
When using the Market Model to calculate company-specific abnormal returns that are higher than expected, what happens to abnormal return when alpha expectations are increased?
Decreases.
Current ratio equals...what does it indicate, and where to the components come from?
Current assets divided by current liabilities It indicates ability to meet current liabilities The components come from the balance sheet and is a liquidity ratio
What is the value representation between the Current, Quick, and Cash ratio?
Current ratio will always be greater than or equal to the quick ratio and the cash ratio will always be less than or equal to the quick ratio
Dividends paid for US GAAP is what type of Cash Flow?
Financing
What is the degree of price discrimination wherein a consumer is charged the highest price that he or she is willing to pay?
First degree price discrimination
The income-based approach calculates GDP as the sum of factor incomes and essentially measures the cost of producing final output.
GDP = National income + Capital consumption allowance + Statistical discrepancy
The primary difference between GDP and national income is:
GDP includes the capital consumption allowance; national income does not.
What are the three additional elements of financial reporting that FASB has compared to IFRS?
Gains, losses and comprehensive income
Corporations that opt to disclose information on a limited basis run the risk of what?
Insider-trading violations
Under a finance lease what is considered a nonoperating expense?
Interest expense
Who is mandated to develop international standards for auditing?
International auditing and assurance standards board
GIPS standards apply to whom?
Investment management firms and prospective clients
Increasing the valuation allowance decreases what and increases what?
It decreases net deferred tax assets and net income It increases income tax expense
What is the advantage of Monte Carlo simulation over historical simulation?
It is a useful tool for financial professionals to conduct "what-if" analyses
The Central Limit Theorem states that if the sampling distribution of the sample mean is calculated using samples of equal size from a population that is not normal, then:
It is approximately a normal distribution
What is Form DEF-14A used for?
It is required filing of proxy statements with the SEC
What is the definition of sampling error?
It is the difference between a sample statistic used to estimate a population parameter and the actual by unknown value of the parameter
The general journal is the first step in the flow of information through a financial reporting system.
It is where all transactions are recorded showing which accounts they affect. They are recorded in date order.
In a margin trading account, how does the maintenance margin requirement relate to the initial margin requirement?
Lower
The main risk for an investor with a negative duration gap is:
Lower interest rates
What is Standard IV(A)?
Loyalty to employer (related duties to employer)
What is Standard III(A)?
Loyalty, Prudence, and Care
The duration gap is the...
Macaulay duration minus the investment horizon.
Information about extraordinary items and other unusual or infrequent events is most likely found in:
Management Discussion & Analysis
If a member candidate does not accept the charges and proposed sanction levied by the CFA Professional Conduct Program, the matter is referred to a panel composed of whom?
Disciplinary Review Committee Members
The standard deviation of an equally weighted portfolio divided by the standard deviation of a single security is known as the...
Diversification ratio
There are three forms of credit risk. What are they?
Downgrade risk, market liquidity risk, spread risk
Safety-First Criterion ratio equals
E(R) - Minimum Return / standard deviation Choose the one with the highest SFR ratio
Effective annual rate equals...
EAR = (1 + periodic rate) ^Periods per year - 1
EAR of a continuously compounded interest rate equals...
EAR=e^APR - 1
Effective annual yield for MM instruments equals
EAY = (1 + HPR)^365/t - 1
Fixed charge coverage ratio equals
EBIT + Lease payments divided by interest payments + Lease payments
Interest expense equals....
EBIT - EBT
Interest coverage ratio equals....
EBIT divided by (EBIT - EBT)
Interest coverage ratio equals
EBIT divided by interest payments
Return on total capital ratio equals
EBIT divided by short and long term debt and equity
Pretax margain ratio equals
EBT divided by revenue
The objective of an audit is most likely to:
Enable an auditor to express an opinion on the fairness and reliability of the financial statements
Accounting Equation 4b
Ending Retained Earnings = Beginning Retained earnings + Revenues - Expenses - Dividends
Accounting Equation 4a
Ending retained earnings = Beginning retained earnings + Net Income - Dividends
Free cash flow to the firm with net income
FCFF = NI + Non cash Charges + Interest expense - Capital expenditures (Fixed capital) - working capital expenditures
When operating in a period of rapidly changing prices, which inventory method provides the most useful measure of the balance sheet?
FIFO because the ending inventory reflects the most recent purchases
Holding period return for MM instruments equals
Face value / Purchase price - 1
Dividends received for US GAAP is what type of Cash Flow?
Operating
Interest paid for US GAAP is what type of Cash Flow?
Operating
Interest received for US GAAP is what type of Cash Flow?
Operating
Under US GAAP interest paid and interest received are both classified as what type of activity for all companies?
Operating activities
Income that is independent of a firm's capital structure is:
Operating income (revenue - COGS - sales, general and admin (SGA) and R&D) Therefore, it is prior to interest costs, which reflect the cost of debt financing
Operating ROA ratio equals
Operating income divided by Average total assets
Dividends paid for IFRS is what type of Cash Flow?
Operating or Financing
Interest paid for IFRS is what type of Cash flow?
Operating or Financing
Interest received for IFRS is what type of Cash Flow?
Operating or Investing
Dividends received for IFRS is what type of Cash Flow?
Operating or investing
What is operating profit and what is another term for it?
Operating profit equals gross profit less operating expenses or EBIT
The point at which the capital allocation line tangents the efficient frontier is the:
Optimal risky portfolio for all investors irrespective of their risk preferences.
What is Standard II(B)?
Market Manipulation
What is Standard I(D)?
Misconduct
What is standard I(C)?
Misrepresentation(plagiarism)
Profit-maximizing firms will expand production until marginal revenue equals marginal cost in:
Perfectly and imperfectly competitive markets
Profit-maximizing firms will expand production until marginal revenue equals marginal cost in:
Perfectly competitive and monopolistically competitive markets.
When it comes to productive efficiency what type of market is the most efficient?
Perfectly competitive markets
What is Standard III(D)?
Performance presentation
The minimum-variance frontier represents:
Portfolios with the lowest level of risk for each level of expected return.
Information about directors' compensation is most likely to be included in a firm's:
Proxy Statement
Payables turnover ratio equals
Purchases divided by average trade payables
Number of days of payables ratio equals
Purchases divided by payable turnover
Payables turnover ratio equals...
Purchases/average trade payables
ROE equation 1a equals
ROA x leverage or... Net income divided by average total assets x average total assets divided by shareholders' equity
What is Standard V(A)?
Reasonable basis for investment recommendations
Under Standard IV(B) (additional compensation arrangements) members are required to...
Provide all the details regarding the additional compensation arrangement for services rendered to their employers, when requested by the employers.
What is Standard V(C)?
Record Retention (may be maintained either electronically or hard copy form)
A rational risk averse investor will select the portfolio with highest...
Reward to risk ratio
Historically, there has been a positive relationship between risk and return, which suggests that market prices are primarily determined by investors who are predominantly...
Risk Averse
Executing the requirements of the Sarbanes-Oxley Act and overseeing the PCAOB is the responsibility of the:
SEC
Plotting the difference between an asset's return over the risk-free rate against the difference between the market's return over the risk-free rate produces the...
Security Market Line
The line that represents the relationship between expected return and market risk of the security is the:
Security Market Line
When a firm sets aside a reserve to cover potential losses, this can be referred to as:
Self-insuring
The optimal risky portfolio is a portfolio that carries the highest...
Sharpe Ratio among all possible portfolios made of risky assets. Carries the most reward in return per unit of risk taken
The indirect method of reporting cash flows calculates operating cash flow by which method?
Start with net income for the period, adjust for all noncash expenses/revenues, adjust for nonoperating items included in net income and then adjust for changes in the balance of operating asset and liability accounts
Which statement would an analyst fund most useful in assessing a company's ability to react quickly to an opportunity that requires an immediate cash investment?
Statement of cash flows....shows the financial flexibility of a firm
Changes resulting from share issuance or repurchase and changes resulting from retained earnings is shown on the:
Statement of stockholders' equity.
When selecting a sample, a population is first divided into subpopulations and then random samples are taken from each subpopulation, the number taken proportional to the size of the subpopluation..this is an example of...
Stratified random sampling which ensures that different subdivisions withing a population are represented in the sample
What is Standard III(C)?
Suitability
An insurer promises to pay the insured a certain amount of money if a third party fails to fulfill its obligation. This is most likely the definition of:
Surety Bonds
If the probability of success for a binomial distribution is 0.5 then the binomial distribution is....
Symmetric
Total risk is best defined as the standard error of the residuals plus:
Systematic Risk
A portfolio of securities with a correlation coefficient of -1 will most likely have:
Systematic risk but no unsystematic risk. A portfolio with a correlation of -1 is a well-diversified portfolio and has systematic risk but no unsystematic risk.
Which formula accurately exhibits the relationship between annual convexity statistic and yield-to-maturity to calculate the convexity adjustment?
The annual convexity statistic, times one-half, multiplied by the change in the yield-to-maturity squared.
The capital allocation line with the highest slope joins the risk-free asset and:
The optimal risky portfolio.
The optimal risky portfolio based on the capital market theory is at:
The point of tangency between the capital market line (CML) and the efficient frontier.
Most regulatory authorities do not require reconciliation of IFRS - compliant reports to...
US GAAP
If a stock lies above the SML, this would indicate that the stock:
Undervalued
Amira resides in Cairo and holds all of her wealth in Google stock. The most appropriate measure of risk for Amira is the:
Variance of Google Returns
What is unbilled or accrued revenue and where does it lie on the balance sheet?
When a company has recognized revenue in the financial statements but has not billed the customers or received cash...it is an asset
Financial leverage ratio equals...what does it indicate, and where to the components come from?
Total assets divided by total equity Financial risk and financial leverage The components come from the balance sheet and is a solvency ratio
Debt to capital ratio equals
Total debt / total debt + shareholders' equity
Debt to assets or total debt ratio equals
Total debt divided by total assets
Debt to equity ratio equals...what does it indicate, and where to the components come from?
Total debt divided by total equity Financial risk and financial leverage The components come from the balance sheet and is a solvency ratio
Total debt ratio equals...what does it indicate, and where to the components come from?
Total debt divided by total equity Financial risk and financial leverage The components come from the balance sheet and is a solvency ratio
Long-term debt to equity ratio equals...what does it indicate, and where to the components come from?
Total long term-debt divided by total equity Financial risk and financial leverage The components come from the balance sheet and is a solvency ratio
Fiscal deficit cannot be financed by:
Trade surplus G-T = (S-I)-(X-M)
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 quality of services they are provided.
The point and figure chart utilizes...
X's for price rises and O's for price declines
The lognormal distribution is bounded by...
zero on the left and has a long tail on the right so it is positively skewed. The bound of zero means the distribution is often used to model asset prices.
The power of a test is the probability of correctly failing to...
accept the null hypothesis when it is false
The optimal risky portfolio is comprised of all assets and weighted...
according to their market value weights.
Gross domestic product (GDP) can be thought of as the costs of raw materials plus the value:
added at each step of the production and distribution functions.
A payment-in-kind bond can be set up to pay a coupon of...
additional bonds (or some other security, such as common shares) in lieu of cash.
The cost of carry of a non dividend paying stock only includes the...
cost to finance because there are no storage costs or income earned.
An important part of analyzing financial statements is identifying the types of accruals and valuation entries in an entity's financial statements. Most of these items will be noted in the....
critical accounting policies/estimates section of MD&A and in the significant accounting policies footnote, both found in the annual report
Working capital equals....
current assets - current liabilities
Accounts receivable are part of the company's regular operations and are thus included in...
current assets which is part of working capital
Risk management is defined as the process of identifying the...
desired level of risk, identifying the actual level of risk, and altering the latter to equal the former
When communicating recommendations to clients, the Investment Analysis, recommendations and Actions Standard (V(A)) requires members to...
disclose any material changes to the member's investment selection methodology.
A test statistic is calculated by....
dividing the difference between the sample statistic and the hypothesized value of the population parameter by the standard error of the sample statistic
For a risk-neutral investor, the indifference curve and the efficient frontier...
do not tangent the capital allocation line at the same point.
A perfectly inelastic demand curve is one that...
does not move even with a change in price.
If something is compounded continuously use what on the calculator?
e^x
Under US GAAP deferred tax assets and deferred tax liabilities are classified on the balance sheet as:
either current or noncurrent items, depending on the classification of the asset or liability for financial reporting.
The Z-spread is based on the...
entire benchmark spot curve. The G-spread is based on a specific government bond rate and the I-spread is the spread over or under rates based on interest-rate swaps.
Parameters describe an
entire population
Dividends declared is a noncash...
financing activity
The general journal is the....
first step in the accounting system flow
The higher expected return on savings, the more savers will...
forgo current consumption and move money to the future
A futures contract is a type of...
forward agreement that has standardized contract terms and is traded on a regulated exchange.
The higher the cost of borrowing, the lower the amount of money borrowers would want to move from...
future to the present
Settlement is a practice wherein the...
gains and losses on a futures position are credited and charged to the trader's margin account on a daily basis.
The sustainable growth rate can be thought of as:
growth in the labor force plus growth in labor productivity.
Luxury goods usually have a...
high income elasticity of demand. Which means as incomes rise, the demand for these goods rises at an even faster rate.
In a candlestick chart, the longest candlestick indicates...
high price volatility
The graphical equivalent of a frequency distribution is a...
histogram
The linear scale is most appropriate to show stock price....
history
The limitations on liens covenant is meant to put limits on...
how much secured debt an issuer can have.
A foreign bond is traded...
in a domestic market, but it is a foreign bond because the issuer is incorporated in a different country
There are limited real-world evidences for a...
kinked demand curve model.
Systematic random sampling is when we select every....
kth member of a population, often used when we cannot number or label the members of a population
The decennial pattern traces the average annual stock returns according to the...
last digit of the year
The amount of cash or cash equivalents that could be currently obtained by selling an asset in an orderly disposal is called:
realizable value...for liabilities the equivalent of realizable value is called settlement value
A deferred tax asset arises when post employment benefits are...
recognized for financial reporting when earned by the employee but not deducted for tax purposes until paid
The low correlation of alternative investments affect the Sharpe ratio and downside risk measures by:
reducing the standard deviation of a diversified portfolio below the weighted average.
The requirement for a company to prepare its financial reports in accordance with specified accounting standards in most likely the responsibility of:
regulatory authorities only.
If the p value is less than the specified level of significance, the we...
reject the null hypothesis
Intermarket analysis involves the use of...
relative strength analysis for different groups of securities to make allocation decisions.
Measurement bases for valuation that require little judgment are more...
reliable but less relevant than those that require more judgment.
Significant non cash investing and financing activities are not...
reported in a line items in the cash flow statement, rather in a supplemental disclosure to the cash flow statement.
Under U.S. GAAP a correction of errors for the prior period is made by...
restating all prior period financial statements presented in the financial report and disclosure in the footnotes is also required for any correction of the prior period errors
Return on equity equals...
return on assets x financial leverage
The Sharpe ratio and Roy's safety-first ration will be equal when the...
risk free rate of return is equal to critical level
Yield on the corporate bond =
risk-free rate + inflation risk premium + maturity risk premium + liquidity risk premium
The standard setting approaches are...
rules-based, principles-based, and objectives oriented.
Statistics describes a...
sample
A sample statistic is a descriptive measure of a...
sample characteristic
Third-degree price discrimination happens when customers are...
segregated by demographic or other traits.
A contrarian technical strategy based on Bollinger bands aims to...
sell the security when it reaches the upper band and purchase the security when it touches the lower band.
Yield duration is the....
sensitivity of the bond's price to its own yield to maturity
Curve duration is the....
sensitivity of the market value with respect to a benchmark yield curve
Under U.S. GAAP an extraordinary item will be reported...
separately on the income statement, below discontinued operations and net of tax. It will impact net income and is not reported separately in comprehensive income
Stackelberg model assumes that firms make decisions....
sequentially
The probability of a true null hypothesis being rejected is also called the...
significance level of a hypothesis
Compound interest rates will always be slightly higher than...
simple interest rates (APR)
Normal distribution with known variance use...
small sample z stat large sample z stat
The standard error of the sample mean equals...
standard dev/Square root of sample size
The coefficient of Variation (CoV) is the...
standard deviation / mean
The Herfindahl-Hirschman Index is calculated as the:
sum of the squares of n firms market shares.
The underlying logic of technical analysis is that....
supply and demand determine prices, and changes in supply and demand cause changes in prices
The I-spread measures the difference between the yield on a bond and the rate on a...
swap with the same tenor
Normal distribution with unknown variance use...
t stat for small and large sample
Income Tax expense equals...
taxes payable + change in deferred tax liabilities - change in deferred tax assets
Presentation of income statement and other comprehensive income is the same under both US GAAP and IFRS, except...
that in US GAAP the firm could choose to report comprehensive income in the statement of shareholders' equity
For tests concerning difference between the variances of two normally distributed population based on two random independent samples the appropriate test stat is
the F test
Current cost equals the...
the amount of cash or cash equivalents that would have to be paid to buy the same or an equivalent asset today.
Under IFRS reversals are permitted but only up to...
the amount of the original write down
A general journal is...
the collection of all business activities sorted by date
Under U.S. GAAP gross revenues should only be used if...
the company is the main obligor under the contract, bears inventory risk and credit risk and can choose the supplier and price.
The first or introductory paragraph of a standard independent audit report describes...
the financial statements that were audited and the responsibilities of both management and the independent auditor.
The second or scope paragraph of a standard independent audit report describes...
the nature of the audit process and provides the basis for the auditor's opinion
The z or t stat can be used when...
the population variance is not known and the sample size is large.
When material, dissimilar items are required...(IAS 1)
to be separately presented in the financial statements.
The purpose of general-purpose financial reporting is to provide....
to potential investors and creditors information about the firm that is useful for making their decisions about investing in or lending to the firm.
The objective is to harmonize US GAAP and IFRS, not....
to replace one with the other, work on harmonization is ongoing
Arbitrage effects in making two assets with identical payoffs...
to sell for the same current price.
Debt to capital ratio equals
total debt divided by total debt + total shareholders' equity
Debt to equity ratio equals
total debt divided by total shareholders' equity
A trial balance is a statement that lists....
total ending balances of each account at a particular point in time.
Maximum profit is equal to...
total revenue less total costs
When a false null hypothesis is not rejected it is called...
type II error
A security whose expected rate of return is greater than the required rate of return is considered...
undervalued and plots above the security market line.
Deferred revenue is...
unearned revenue
Bar charts plot...
ungrouped discrete frequency observations
A forward contract at inception has no...
value
The chi square test statistic is used to test for....
variance when we have a normally distributed population. It is always zero or a positive number and has different distributions based on the number of degrees of freedom.
What does the effective tax rate equal?
Income tax expense/ pre tax income. Therefore, a decrease in pretax income will increase the effective tax rate.
return on common equity equals...
(Net income - preferred dividends) / average common equity
Z stat equals...
(Sample mean - population mean) / standard error of the sampling mean
The special considerations for high-yield analysis are...
(a) greater focus on the issuer's liquidity and cash flow; (b) detailed financial projections; (c) detailed understanding and analysis of the debt structure; (d) understanding of an issuer's corporate structure; (e) covenants; and (f) equity-like approach to high yield analysis.
The mean for a binomial probability distribution is...
Number of trials x probability of success n x p
The move toward a single accounting framework involves moving to an approach that is:
Objectives oriented
The most recently auctioned Treasury bonds are called:
On-the-run issues
When the correlation between the securities is +1, an increase in the returns of the portfolio can happen only with...
an increase in the risk of the portfolio.
In perfect competition, prices are lower and total output is the...
as in a situation where a monopoly engages in perfect price discrimination.
Type 1 errors and Type II errors are...
mutually exclusive
Coupon reinvestment risk dominates market price risk when there is a...
negative duration
If the mean of the distribution is below the median than the distribution is most likely...
negatively skewed
A cash flow statement in the indirect format begins with...
net income and shows adjustments to derive operating cash flow.
Comprehensive income is...
net income plus all other changes in stockholders' equity resulting from transactions with non business owners.
Return on assets equals...
net profit margin x total asset turnover
Temporary differences between taxable and accounting profit result in...
no difference between a firm's statutory tax rate and its effective tax rate.
Deferred tax assets and liabilities are always classified as
noncurrent assets or liabilities
For most financial assets convenience yields are basically....
nonexistent
Convenience yield is the...
nonmonetary benefit of holding an asset
If the amounts and timing of tax payments resulting from reversals of temporary differences are uncertain then deferred taxes should....
not be included in equity or liabilities
When available for sale securities are held by a firm, under US GAAP an unrealized gain is.....
not recognized on the income statement but is deferred as a valuation gain in stockholders' equity and reported in comprehensive income and subsequently recognized on the balance sheet.
In a plain-vanilla interest rate swap:
notional principal is exchanged only at expiration of the swap.
Days of sales outstanding ratio (DSO) equals
number of days in period divided by receivables turnover
Payable turnover ration indicates the....
number of times the company pays off its creditors. Higher payable turnover ratio indicates that the company may not be using its credit period given by its suppliers effectively
Cross-sectional data are a type of data collected by...
observing many subjects at the same point in time, or without regard to differences in time
Exit strategy funds look to...
offer a dominant strategy that when implemented converts publicly traded equity to private equity investment funds.
Medium term notes (MTNs) are...
offered to investors on a continuous basis by the issuer or its agent
When the investment horizon is equal to the Macaulay duration of a bond, coupon reinvestment risk...
offsets market price risk.
Current Assets are those assets that are expected to be sold, used up, or converted to cash within...
one year or operating cycle, whichever is greater.
Operating profit margin ratio equals
operating income divided by revenue
A security whose required rate of return is greater than the expected rate of return is considered...
overvalued and plots below the security market line
A descriptive measure of a population characteristic is know as a...
parameter
Holding period return equals
HPR = (P1 - Po + D1)/ Po
The Macaulay duration of a bond tends to be shorter for a bond if its coupon rate and yield to maturity are:
High....high coupon rates and high yields to maturity will tend to shorten duration
Assets such as securities held to maturity are shown on the financial statement as their:
Historical Cost
What yield measure is the best representation of the return an investor is likely to realize on a discount instrument?
Holding period yield
The internal rate of return between the sum of the reinvested coupon payments and the sale price and the purchase price of the bond is known as?
Horizon yield
In hypothesis testing the probability of rejecting the null hypothesis when it is true is the:
Level of significance....is the probability of a type 1 error of rejecting the null hypothesis when it is true
For a given large change in yields, if the price gain of a bond is less than the price loss, then the cause can be explained by:
Negative convexity
Owners' Equity can be referred to as...
Net Book Value
Return on common equity ratio equals
Net income - preferred dividends divided by average common equity
EBT equals....
Net income divided by (1 - tax rate)
ROA ratio equals
Net income divided by average total assets
Return on equity ratio equals
Net income divided by average total equity
Net profit margin equals
Net income divided by revenue
ROE equation 1b equals
Net profit margin x total asset turnover x leverage or.... Net income divided by revenue x Revenue divided by total assets x average total assets divided by average shareholders' equity
Head and shoulder analysis equation equals
Price Target = Neckline -(Head - Neckline)
In a typical head and shoulders trading pattern, what happens to prices on the right of the head?
Prices go lower to the right of the neckline on a normal head and shoulders trading pattern
A code of ethics sets out what?
Principles of behavior for a group
Under IFRS what is the difference between research costs and development costs in regards to amortization?
Research cost is expensed as incurred Development cost are capitalized!
Nonnormal distribution with unknown variance
Small sample not available Large sample t stat
Nonnormal distribution with known variance use...
Small sample... not available Large sample z stat
Taking advantage of perceived short-term opportunities through varying from strategic asset allocation weights is:
Tactical asset allocation
Double top reversal pattern price target equation
Target = Valley - (Second Peak - Valley)
Venture capital funds look to....
Target start-up companies who are in the early stages of their existence.
ROE equation 1c equals
Tax burden x interest burden x ebit margin x total asset turnover x leverage or Net income/ebt x ebt/ebit x ebit/revenue x revenue/average total assets x average total assets/average shareholders equity
Price and volume data are relied on most in:
Technical Analysis
For a holder of a protective put, if at the time of expiration, the value of the underlying is less than the exercise price, then the overall position is worth:
The exercise price
When forecasting the future cash flows of a non-agency residential mortgage-backed security (RMBS), two important factors investors should consider are the:
collateral's default rate and the recovery rate if default occurs.
A decrease in bond prices indicates a rise in...
commodity prices
Relative strength index is in regards to...
comparing the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset
A risk-averse investor is ready to take high risk only if it is...
compensated by a proportionately high return.
An ascending triangle pattern is a...
continuation and indicates increasing prices so shares should be bought
A continuous distribution's probability function takes the form of a....
continuous curve, and its random variables takes on an infinite number of possible values
An account that reduces the value of an asset, to a new estimate of its net realizable value is a...
contra account
Nonparametric tests are not concerned with...
parameters; they make minimal assumption about the population from which a sample comes
A normal good is something used to describe a...
particular good or service as a result of a shift in the given level of income
When the market is informationally efficient, it is better to use a...
passive strategy because market prices already reflect new information.
In accounting for pensions, IFRS includes...
past service cost in the pension expense
In accounting for pensions, US GAAP places...
past service cost on the balance sheet and amortizes it onto the income statement over time.
Harmonic mean is the average price on a...
per share basis
An oppropriate method to prepare a common size cash flow statement is to show each line item as a...
percentage of net revenues
There is more nonprice competition in a monopolistic competition than in a...
perfect competition
In FIFO or Specific identification cost of sales and ending inventory will be the same under the....
perpetual as well as the periodic inventory valuation method.
Convergence of global accounting standards is most likely slowed by:
political pressure from a large number of stakeholders
For most physical commodities convenience yields are....
positive
If the mean of the distribution is above the median than the distribution is most likely...
positively skewed
The sustainable rate of economic growth is measured as the rate of increase of:
potential GDP
Risk-neutral investors do not require...
premium for corresponding additional risk.
For a given discount rate, the longer the time period till the future amount is received, the lower the...
present value
For a given time period, the higher the discount rate, the lower the..
present value of the amount
Money duration is the...
price change in units of the currency by which the bond is denominated.
Members and Candidates must self-disclose on the annual Professional Conduct Statement all matters that question their...
professional conduct, such as involvement in civil litigation or criminal investigations or being the subject of a written complaint
Under IFRS and GAAP if a firm cannot reliably measure the outcome of the project then...
profit is recognized only when the project is complete
Changes in accounting estimates are handled...
prospectively with the change affecting the financial statements for the period of the change and future periods.
Nonparametric test is most likely to be used when the data is given in....
ranks. These tests are used when the hypothesis concerns a defining feature of the population and when the data meets distributional assumptions
Common size statement analysis of the balance sheet will help identify changes in....
ratios that use balance sheet items. This includes financial leverage which is assets/equity
To value the forward after inception the correct formula is...
"Spot price + PV(cost) − PV(benefit) − [Forward price/(1 + risk-free rate)^remaining time to maturity]."
The discrete uniform distribution is also known as the...
"equally likely outcomes distribution"
If a firm has a 1-month 1% value at risk (VaR) of $100 million, it means it expects to lose:
$100 million or more in 1% of 1-month periods.
Bank Discount Yield Equation equals
(([Face Value] - [Current selling price])/[Face Value} x (360/(Days to maturity])
Interest coverage ratio equals...what does it indicate, and where to the components come from?
(CFO + Interest paid + taxes paid) divided by interest paid Ability to meet interest obligations The components come from the statement of cash flows and is a coverage ratio
Cash ratio equals...what does it indicate, and where to the components come from?
(Cash + Marketable securities) divided by Current liabilities Ability to meet current liabilities The components come from the balance sheet and is a liquidity ratio
Quick(Acid) ratio equals...what does it indicate, and where to the components come from?
(Cash + marketable securities + receivables) divided by current liabilities ability to meet current liabilities The components come from the balance sheet and is a liquidity ratio
Price impact =
-(Modified Duration × ΔSpread) + ½ × Convexity × (ΔSpread)^2
A two-asset portfolio's standard deviation is minimized when the correlation between the two assets equals:
-1
What are 3 characteristics or stratified random sampling?
1. A stratified random sample can provide greater precision than a simple random sample of the same size. 2. Stratified random sampling is used in the investment world to create a portfolio that replicates an index such as a bond index 3. With proportionate stratification for stratified sampling, the sample size of each stratum is proportionate to the population size of the stratum.
What are the 6 components of the Code of Ethics?
1. Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets 2. Place the integrity of the investment profession and the interests of clients above their own personal interests 3. Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities. 4. Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession. 5. Promote the integrity of, and uphold the rules governing, capital markets 6. Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals
Desirable attributes that an accounting standards board should posses are...
1. Be guided by a well articulated framework 2. Clearly defined responsibilities and high professional standards. 3. Decisions being made that are consistent processes 4. Decisions being make that are consistent with the framework's stated objective and are made independently 5. Seeking out and considering stakeholders' input but not allowing pressure from external forces to influence decisions. 6. Developing of high quality standards in the public interest and which are recognized and adopted by regulators
What are the four limitations of balance sheet anaylsis
1. Comparisons with peer firms are limited by difference in accounting standards and estimates 2. There is lack of homogeneity as many firms operate in different industries 3. Interpretation of ratios requires significant judgement 4 Balance sheet data are only measured at a single point in time.
The five steps of revenue recognition are...
1. Contract with customer 2. Identify performance obligations (distinct good or service) 3. Price determined 4. Allocate price to performance obligations 5. Recognize revenue when satisfied a performance obligation
National income includes...
1. Corporate profits before taxes 2. Unincorporated net income 3. Compensation of employees
3 characteristics of Elliot Wave Theory are:
1. Positive price movements would take prices up by a factor equal to the ratio of a Fibonacci number to its preceding number. 2.In a bull market, the market moves up in five waves, and is followed by a downward movement in three waves. 3.It can be used in long-term economic analysis and short-term trading.
List of financial asset that are measured at cost or amortized cost?
1. Unquoted equity instruments 2. Held to Maturity investments 3. Loans to and receivables from another company
A PCP (professional conduct) investigation may be initiated in what four ways?
1. Self reporting of an incident on the member's annual disclosure statement 2. A written complaint filed with the PCP 3. A media report implicating a violation 4. An exam proctor report filed from an official examination center
To be in accordance with the IASB No. 1 (IAS 1) what are the five required financial statements?
1. Statement of Financial Position 2. Statement of Comprehensive Income 3. Statement of Changes in Equity 4. Statement of Cash flows 5. Notes to the Financial Statements
For a model that is developed through data mining, there are two steps required to see if the model should be used:
1. Test the model on out-of-sample data and see if it works 2. Examine the model to make sure that the variables being used have an economic rationale
What are the three core objectives of the International Organization of Securities Commission (IOSCO)?
1. The protection of investors 2. Ensuring that markets are fair efficient and transparent 3. Reducing Systematic Risk
In using the F distribution test statistic the following are assumed?
1. The random samples comes from a normal population 2. The two random samples are independent of each other
What are the 3 determinants of elasticity?
1. Time period 2. Luxury 3. Number of substitutes
Lists of financial assets that are measured at fair value?
1.Held for trading 2. Available for sale 3. Derivatives whether stand-alone or embedded in non-derivative instruments 4. Non derivative instruments with fair value exposures hedged by derivatives
The momentum oscillator is calculated as....
100 times the difference between the last closing price and the closing price x days ago
Kondratieff Wave theory suggests that economics went through a...
54 year economic cycle.
What is a natural monopoly?
A natural monopoly is one with such high infrastructure costs that it is not efficient for anyone else to enter the market.
Risk budgeting in an enterprise:
Allocates the risk appetite across the different activities of the enterprise.
Under US GAAP minority interest expense appears in the:
Balance sheet as a stockholders equity.
Cash collected from sales equals...
Beginning AR + credit sales - Ending AR
The slope of the security characteristic line represents the asset's...
Beta
Cash flow per share ratio equals...what does it indicate, and where to the components come from?
CFO - Preferred dividends divided by number of shares outstanding Operating cash flow on a per-share basis The components come from the statement of cash flows and is a performance ratio
Free cash flow to equity equals
CFO - fixed capital investment + net borrwoing
Cash return on assets ratio equals...what does it indicate, and where to the components come from?
CFO dived by average total assets Operating cash generated per dollar of asset investment The components come from the statement of cash flows and is a performance ratio
Cash return on equity ratio equals...what does it indicate, and where to the components come from?
CFO divided by average shareholders equity Operating cash generated per dollar of owner investment The components come from the statement of cash flows and is a performance ratio
Investing and financing ratio equals...what does it indicate, and where to the components come from?
CFO divided by cash outflows for investing and financing activities Ability to acquire assets, pay debts, and make distributions to owners The components come from the statement of cash flows and is a coverage ratio
Reinvestment ratio equals...what does it indicate, and where to the components come from?
CFO divided by cash paid for long term assets Ability to acquire assets with operating cash flows The components come from the statement of cash flows and is a coverage ratio
Debt payment ratio equals...what does it indicate, and where to the components come from?
CFO divided by cash paid for long-term debt repayment Ability to pay debts with operating cash flows The components come from the statement of cash flows and is a coverage ratio
Dividend payment ratio equals...what does it indicate, and where to the components come from?
CFO divided by dividends paid Ability to pay dividends with operating cash flows The components come from the statement of cash flows and is a coverage ratio
Cash flow to revenue ratio equals...what does it indicate, and where to the components come from?
CFO divided by net revenue Operating cash generated per dollar of revenue The components come from the statement of cash flows and is a performance ratio
Debt coverage ratio equals...what does it indicate, and where to the components come from?
CFO divided by total debt Financial risk and financial leverage The components come from the statement of cash flows and is a coverage ratio
Cash to income ratio equals...what does it indicate, and where to the components come from?
CFO divided operating income Cash generating ability of operations The components come from the statement of cash flows and is a performance ratio
What is an agreement made openly and formally?
Cartel
Current ratio numerator components are...
Cash + Marketable securities + inventories + receivables
Defensive interval ratio equals
Cash + Short term marketable investments + receivables divided by daily cash expenditures
If yield increases then what happens to the duration effect and the convexity effect?
Convexity effect increases and the duration effect decreases
Credit ratings given to the issuer of a debt are called....
Corporate family ratings
Cash conversion cycle (Net operating cycle) ratio equals
DOH + DSO - Number of days of payables
What is Standard III(B)?
Fair dealing of clients
Which form should be used by a firm planning for an initial public offering?
Form S-1
Under the Elliott Wave Theory, the longest of the waves is called the:
Grand supercycle and is the longest wave and takes place over centuries
EBIT equals....
Gross Profit - selling, general, and administrative expenses - research and development cost
Gross profit margin ratio equals
Gross profit divided by revenue
What is gross profit?
Gross profit equals revenue less cost of goods sold.
Comparative data should be provided for the previous year for items in the financial statements is a requirement of...
IFRS
What is the right order of steps in making a correct ethical decision?
Identify, consider, decide and act, reflect.
Leveraged buyout funds look to do what?
Improve new or underperforming companies to increase their market value and conduct a profitable sale.
If tow goods are perfect substitutes, then the cross-price elasticity of demand and will be:
Infinity. If they are perfect substitutes, any increase in the price of one good will cause an infinitely large increase in demand for the other good
Potential growth rate equals
Labor force + Labor Productivity
The cross-price elasticity for two complementary products that are very closely related is a relatively:
Large negative number
When representing changing values over time what type of graph is most appropriate to use?
Line graph
Which of the following correctly lists two key indicators of the potential credit performance of commercial mortgage-backed security (CMBS)?
Loan-to-value and debt to service coverage ratios
What are the two major components of credit risk?
Loss severity and default risk
What is Standard II(A)?
Material Non Public information
t stat equals
Mean - population / (sample deviation/ Square root of sample size)
Financial reporting standards can be established by applying an asset/liability approach or a revenue/expense approach. For a single coherent financial reporting framework, this conflict creates the inherent limitation of:
Measurement
The method of collecting public and nonpublic information about a company to calculate the value of its securities is given by:
Mosaic Theory
If IRR is less than cost of capital then what does that say about NPV?
NPV is less than zero
The nominal risk free rate equals
Nominal RFR = Real RFR + expected inflation
Under an operating lease what type of expense is not recognized?
Nonoperating expenses
The practice of assigning different credit ratings to debts issued by a same issuer is called:
Notching
Number of days payable equals...
Number if days in the period/payables turnover
Days of inventory on hand ratio (DOH) equals
Number of days in period divided by inventory turnover
If a stock lies below the SML, this would indicate that the stock:
Overvalued
Accounting Equation 2
Owners' Equity = Contributed Capital + Retained Earnings
Present value of a perpetuity is what equation?
PVn = PMT/r
According to the IFRS Conceptual Framework, information is relevant if it has a....
Predictive value, confirmatory value, or both
What is Standard III(E)?
Preservation of Confidentiality
Equity valuation is usually part of which step in the financial analysis framework?
Processing the data about a company includes computing ratios and performing a valuation of a company's equity.
If a bond's yield-to-maturity (YTM) increases, then the:
Reinvestment income will increase
The level of significance in hypothesis testing is the probability of:
Rejecting the null hypothesis when it is true
Factors used as input for Fama and French multifactor model include...
Relative size Relative book to market value Beta of asset
What are the two fundamental qualitative characteristics in the Conceptual Framework for Financial Reporting (2010)?
Relevance and Faithful representation
The portfolio which duplicates the payoff of the assets is called the....
Replicating portfolio
What is Standard IV(C)?
Responsibilities of Supervisors
Changes in accounting policies and correction of an error for a prior period are accounted how?
Retrospectively
Accounting Equation 3
Revenue - Expenses = Net Income (loss)
Fixed asset turnover ratio equals....
Revenue / Average fixed assets
Fixed asset turnover ratio equals
Revenue divided by average net fixed assets
Receivables turnover ratio equals
Revenue divided by average receivables
Total asset turnover ratio equals
Revenue divided by average total assets
Working captial turnover ratio equals
Revenue divided by average working captial
If the probability of success for a binomial distribution more than 0.5 then the binomial distribution is....
Skewed to the left
If the probability of success for a binomial distribution is less than 0.5 then the binomial distribution is....
Skewed to the right
What hypothesis testing method is used for testing the two equal means of two populations with normal distributions based on two independent random samples?
T statistic
As the number of stocks in an equally-weighted portfolio increases, which of the following three measures contributes most to the portfolio return variance?
The average covariance across all stock return pairs.
What is the change in polarity principle?
The belief that when a stock's resistance level is breached, the resistance level then becomes the support level
When new accounting standards are issued that will be implemented in the future, what are the requirements of a company under IFRS?
The company must provide a discussion on whether there will be any impact from the new standards on the financial statements. The conclusions can be anything from "does not apply" to "management is still evaluating impact" to "the impact of adoption is discussed"
Under US GAAP when the outcome of a contract cannot be reliably measured what accounting method is used?
The completed contract method is used.
Using the weighted average of the Macaulay durations of bonds in a portfolio in order to calculate the Macaulay duration of a portfolio is accurate only when:
The yield curve is flat
A European call option is worth more if:
There are higher costs incurred holding the underlying
What is an adverse audit opinion?
There is a material exception and the auditor has found the financial statements are not a fair representation.
When reviewing a firm's performance, what elements of financial statements is an analyst most likely to examine?
When measuring performance, the elements are income and expenses.
The optimal portfolio for an investor is best described as the point:
Where his/her highest utility curve is tangential to the efficient frontier.
The interest rate on a bond is the sum of risk premiums...
Yield = RFR + Inflation risk + maturity risk + Liquidity + default
A pennant pattern indicates....
a continuation pattern
When the correlation between the securities is 0 or −1, an increase in the returns of the portfolio can happen despite...
a decrease in the risk of the portfolio.
Permanent differences between taxable and accounting profit result in...
a difference between a firm's statutory tax rate and its effective tax rate.
Information about the background of directors would normally be included in....
a stockholder report but not in MD&A
Pari passu (on an equal footing) means...
all creditors at the same level of the capital structure are treated as one class and their priority of claim over the debt is on equal footing. So all the creditors in subordinated debt will have the same priority to claim irrespective of the amount in case of bankruptcy.
The security market line applies to:
all portfolios and individual assets
The general ledger contains...
all the same entires as the general journal but they are stored by account, as opposed to by date, in the general journal.
Under the matching principles, expenses should be recognized in the same period as the...
associated revenues, so the company should recognize estimated warranty expenses in the same period as a sale.
For a bullet bond, the entire payment of principal occurs at....
maturity
Rising margin debt figures indicate that investors are borrowing to purchase shares which is a....
bullish indicator
A general ledger shows all...
business transactions by account and is thus useful in reviewing all of the activity related to a single account
A general journal is a collection of all...
business transactions sorted by date....not by account
When a quant questions asks "Assume interest payments are reinvested" it is the same as
calculating a fixed bond and there is do dividing of the interest rate per number of periods
Nash equilibrium suggests that oligopolists...
cannot increase profits by changing their pricing strategies unilaterally. Nash strategy assumes that each market participant does the best it can, given the reaction of its rivals.
The optimal risky portfolio is found at the intersection of the...
capital allocation line and the efficient frontier.
Firms are not required to provide reconciliation between...
cash flow and income statements.
The quick ratio includes....
cash, marketable securities, and receivables in the numerator
If income tax rates increase then....
deferred tax assets and liabilities will also increase
The basic chart that shows the day's opening and closing prices, as well as the day's high and low prices is a:
daily bar chart
Panel data is...
data wherein multiple cases were observed at two or more time periods
Under perfect competition, if the input prices decrease due to an increase in the demand, then the long run equilibrium price will:
decrease and the long-run supply curve will shift to the right.
As investors become less risk averse, the market price of risk:
decreases and stock values rise.
An interval scale contains data that are characterized by...
equal distances between each point that cause inferences from the data to be meaningful
The rate at which aggregate demand for funds (borrowing) equals the aggregate supply of funds (savings) is called the...
equilibrium interest rate.
Gains and losses resulting from revaluation of assets are recognized directly in...
equity and shown on the consolidated statement of recognized income and expense as well as on the notes to the financial statements.
Total factor productivity must be
estimated after calculating the productivity of capital and labor.
Odds are stated in a way wherein the first number represents the instances of....
event 1 and the second number the instances of event 2
Whistleblowing can be best described as an act of:
exposing illegal activity in a firm
Variation margin must be paid if the investor's margin balance...
falls below the maintenance requirement and must bring the margin balance back to the maintenance requirement.
When the increase in the total risk cannot be explained by an increase in the nondiversifiable risk, it means that the increase in the total risk is because of the increase...
in the diversifiable risk. An investor is not compensated for the diversifiable risk because it can be diversified free of cost.
To get away with a fictitious sale and still maintain the balance of the accounting equation, the company would need to either....
increase assets or reduce liabilities
Eurobonds are bonds that are issued...
internationally, outside the jurisdiction of any single country.
A confidence interval is simply an...
interval or range where we expect to find, with a specified probability, the population parameter
An increase in total factor productivity:
is reflected in an increase in output for a given level of productivity.
The Z-spread, also called zero volatility or static spread...
is the spread that must be added to the Treasury spot rate to give a discount rate that will make the discounted cash flows from a bond equal to its price. The option-adjusted spread is the Z-spread minus the option value in basis points per year.
Covenants tend to focus on clauses that restrict...
leverage, issuance of debt, or spending (on dividends or investment) that would limit the funds available to repay bond holders.
Any portfolio that combines a risky asset portfolio lying on the efficient frontier and a risk-free asset has a...
linear risk-return trade-off.
Demand for products is usually more elastic in the...
long run than in the short run
Under IFRS inventory is recorded as the...
lower of cost and net realizable value
Internal controls are the responsibility of....
management
The slope of the CML is the difference between the...
market portfolio's return and the risk-free rate (rise) divided by the market portfolio's standard deviation (run).
Coupon reinvestment risk dominates...
market price risk when the investor has a long-term horizon
The three-firm concentration ratio is the...
market share of the three largest firms in the industry, not the first three firms on the list, and not the Herfindahl-Hirschman Index.
Kinked demand curve in an oligopoly market assumes that the competitors will..
match a price decrease but not a price increase in an oligopoly market
Market manipulation may be less likely to occur in...
mature financial markets than in emerging markets
When the projects are independent, the NPV method and IRR method of selecting a project will always result in...
the same accept - or - reject decision
Sampling error is calculated as
the sample mean - the population mean
The use of a large sample size in hypothesis testing most likely reduces...
the size of the fail-to-reject-the-null region
A capital-indexed bond is a bond where:
there is a fixed coupon rate applied to a principal that increases with inflation.
According to the presidential cycle theory, the...
third year of a US presidential term boasts the best stock market performance out of all the four years
Net operating cycle indicates the...
time between the outlay of cash and collection of cash. High net operating cycle implies that excessive capital is blocked in the cycle
