MOCK C AM
An economist states that the probability of having the gross domestic product (GDP) of a country higher than 3% is 0.20. What are the odds against a GDP higher than 3%? 5 to 1 6 to 1 4 to 1
4 to 1
According to behavioral finance, observed overreaction in securities markets most likely occurs because of: disposition effect. loss aversion. gambler's fallacy.
B is correct. According to loss aversion-related arguments in behavioral theories, investors dislike losses more than they like comparable gains. Thus, such a behavioral bias can explain observed overreaction in markets. A is incorrect. Disposition effect is a behavioral bias in which investors tend to avoid realizing losses but rather seek to realize gains. C is incorrect. Gambler's fallacy is a behavioral bias in which recent outcomes affect investors' estimates of future probabilities.
Which of the following distinct entities can least likely claim compliance with the Global Investment Performance Standards (GIPS)? A multi-national financial services holding company An investment management division of a regional commercial bank A locally incorporated subsidiary undertaking investment management services
A is correct because the Global Investment Performance Standards require that firms be defined as an investment firm, subsidiary, or division held out to clients or prospective clients as a distinct business entity (0.A.12). A multi-national financial services holding company is unlikely to be solely operating as an investment firm, and the scope of the business could also make it more difficult to claim compliance on a firm-wide basis.
Anna Saar, CFA, is the head of compliance for Tranne Advisory Services, a regional financial services group including asset management, investment banking, and stock brokerage entities. Reviewing a draft client investment management agreement for the asset management unit, she is concerned that the relationships between the firm's various business units are not properly disclosed. To prevent violating CFA Institute Standard VI(A)-Disclosure of Conflicts, which of the following should least likely be addressed in the investment management agreement? The group subsidizes staff loans for share purchases. Management fees are frequently loss leaders for brokerage. Asset managers are likely to support corporate finance deals.
A is correct because the group subsidizing staff loans for the purchase of shares is not a conflict of interest for clients because it is a funding mechanism and does not interfere with objectivity when rendering investment advice or taking investment action. However, asset managers subsidizing their asset management fees and supporting the investment banking corporate finance deals should be disclosed per Standard VI(A)-Conflicts of Interest and Standard VI(B)-Priority of Transactions, respectively. B is incorrect because asset managers subsidizing their asset management fees on the basis that they will use the group's brokerage services is a cross-departmental conflict of interest and should be disclosed in the section on cross-departmental conflicts. C is incorrect because the fact that the asset managers will support the investment banking corporate finance deals is a cross-departmental conflict of interest and should be disclosed in the section on cross-departmental conflicts.
Which of the following is most likely classified as a defensive industry? A mature industry with government-controlled pricing A non-cyclical, high-growth industry A cyclical industry with a few competitors
A is correct. A defensive industry is non-cyclical with stable earnings. A mature industry with government-controlled pricing will have stable earnings and be non-cyclical. B is incorrect. A defensive industry will have stable earnings, not growing earnings. C is incorrect, A defensive industry is non-cyclic.
An asset-backed securitization with a waterfall structure is most likely using which type of credit enhancement? Subordination Time tranching Special-purpose entity (SPE)
A is correct. Asset-backed securitizations can be structured with subordinated bond classes. They function as credit protection for the more senior bond classes; that is, losses are realized by the subordinated bond classes before any losses are realized by the senior bond classes. This type of protection is also commonly referred to as a waterfall structure because of the cascading flow of payments between bond classes in the event of default. The creation of bond classes that possess different expected maturities is referred to as time tranching. An SPE is a bankruptcy remote legal entity that holds the collateral and is considered not an enhancement but, rather, a prerequisite for establishing securitizations. B is incorrect. The creation of bond classes that possess different expected maturities is referred to as time tranching. C is incorrect. An SPE is a bankruptcy remote legal entity that holds the collateral and is considered not an enhancement but, rather, a prerequisite for establishing securitizations.
A swap that involves the exchange of a fixed payment for a floating payment is most likelyequivalent to a series of: off-market forward contracts. forward contracts that all have an initial positive value. forward contracts that all have an initial value equal to the fixed payment.
A is correct. Because the cost of carrying an asset over different time periods will vary, the values of the implicit forward contracts embedded in the swap will not be equal: some may be positive, and some may be negative. Off-market forward contracts satisfy this condition because they can be set at any value. B is incorrect. Because the initial market value of the swap is zero by definition, it cannot be replicated by a series of forward contracts with an initial positive value. C is incorrect. Because the cost of carrying an asset over different time periods will vary, the prices of the implicit forward contracts embedded in the swap cannot all be equal.
Which of the following most accurately describes the basis for construction of nearly all bond market indexes? Dealer prices Model prices Market prices
A is correct. Firms (dealers) are assigned to specific securities and are responsible for creating liquid markets for those securities by purchasing and selling them from their inventory. In addition, many securities do not trade frequently and, as a result, are relatively illiquid. As a result, index providers must contact dealers to obtain current prices on constituent securities to update the index, or they must estimate the prices of constituent securities using the prices of traded fixed-income securities with similar characteristics. B is incorrect. Fixed-income markets are predominantly dealer markets, and many securities do not trade frequently. C is incorrect. Many fixed-income securities do not trade frequently. Though index providers may estimate the prices of constituent securities using prices of traded fixed-income securities with similar characteristics, fixed-income markets are predominantly dealer markets.
Green finance is most likely an example of which ESG-related investment approach? Impact investing Negative screening Values-based investing
A is correct. Green finance is an example of impact investing, which seeks to achieve targeted social or environmental objectives by direct investment in projects or companies. Values-based investing is used to express the moral or ethical beliefs of the investor. Negative screening refers to the practice of excluding certain sectors or companies that deviate from acceptable standards. B is incorrect. Negative screening refers to the practice of excluding certain sectors or companies that deviate from acceptable standards. C is incorrect. Values-based investing is used to express the moral or ethical beliefs of the investor.
A top-down process that offers guidance and directs activities that seek to maximize the value of an enterprise is most likely an element of: risk governance. risk infrastructure. risk monitoring and mitigation.
A is correct. Risk governance is the top-down process and guidance that directs risk management activities to align with and support the overall enterprise. B is incorrect. Risk infrastructure refers to the people and systems required to track risk exposures and to perform quantitative risk analysis to allow assessment of a risk profile. C is incorrect. Active risk monitoring and mitigation requires pulling together risk governance, identification, measurement, infrastructure, policies, and procedures and continually reevaluating in the face of changing risk exposures and risk drivers.
Assuming that there are no changes in the fiscal or trade balances, if investment expenditures become highly sensitive to interest rates, the aggregate demand curve is most likely to be: flatter. steeper. unaffected.
A is correct. Since there are no changes in the fiscal or trade balances, the balance between aggregate expenditure and aggregate income requires that changes in investment spending equal changes in private savings. Assume that interest rates fall: Investment will increase (by a larger amount, given the increased sensitivity to rates); savings will have to fall (this arises because there is less incentive to save, given the lower interest rate; consumption will increase; and national income will increase. The IS curve will be flatter the more sensitive investments are to interest rates. This means that income will have to move more to induce a large enough change in savings to match the change in investment spending, which implies a flatter aggregate demand curve.\ B and C are incorrect. If investment expenditure is more sensitive to interest rates, the IS curve will be flatter, meaning that income will have to move more to induce a large enough change in savings to match the change in investment spending, which implies a flatter aggregate demand curve.
Which of the following is least likely to be a general feature underlying the preparation of financial statements within the International Financial Reporting Standards (IFRS) Conceptual Framework? Matching Accrual basis Materiality
A is correct. The IFRS Conceptual Framework specifies a number of general features underlying the preparation of financial statements, including materiality and accrual basis. Matching is not one of those general features; it is a general principle of expense recognition.
Investors look at many key due diligence factors when investing in hedge funds. Which of the following factors is most likely the biggest challenge to fully assess? Investment strategy and process Size and longevity Track record
A is correct. The investment strategy and process of a hedge fund is likely to be challenging to fully assess because hedge funds often limit disclosure in order to maintain their competitive advantage and to not give away information that is considered proprietary. B is incorrect because the size and longevity of a hedge fund are common items for review and not as difficult to obtain as proprietary information. C is incorrect because a hedge fund's track record should be readily available to investors.
The price of a pay-fixed receive-floating interest rate swap is most likely: the fixed rate that results in a market value of zero for the swap at initiation. the present value of the floating-rate payments minus the present value of the fixed-rate payments. the sum of the fixed-rate payments minus the sum of the floating-rate payments.
A is correct. The price of the swap is the fixed rate on the swap at the start of the transaction such that the present value of fixed payments is equal to the present value of the floating payments and the market value of the swap is zero. B and C are incorrect. These calculations provide the market value of the swap to one of the parties.
If a strengthening economy leads discouraged workers to return to an active employment search, the number of unemployed people would, at least initially, most likely: increase. decrease. remain unchanged.
A is correct. The unemployed are defined as those who are actively seeking employment but are currently without a job. Discouraged workers are without a job but have given up searching for work and so are not classified as being unemployed. A strengthening economy will lead discouraged workers to once again actively search for work; they will be reclassified as unemployed, and at least initially, the number of unemployed people will increase and the unemployment rate will rise. B is incorrect. In the longer term, if the economy is strengthening the number of unemployed people may decrease; however, when people from outside the labor force first re-join the labor force to look for employment they will, at least, initially increase the number of unemployed people. C is incorrect. Although the number of people without jobs has not immediately changed, while classified as discouraged workers the people were excluded from the labor force. Once re-joining the labor force to actively seek employment they will, at least initially, increase the number of unemployed people.
Under International Financial Reporting Standards (IFRS), which of the following is mostcommonly classified as a non-current liability? Deferred tax liability Warranties Notes payable
A is correct. Under IFRS, deferred tax liabilities are always classified as non-current. B is incorrect. A warranty liability can be classified as either current or noncurrent, depending on the timing estimated by the company. C is incorrect. Notes payable are classified as current liabilities if due within one year. Beyond that, they are classified as non-current liabilities.
PNW Bank publishes Investment Monthly magazine, which highlights a specific stock in each issue. Publication of the magazine invariably causes the highlighted stocks to rise significantly in value. Rachel Coursing, CFA, manager of PNW's marketing department, often trades in the securities mentioned in the Investment Monthly articles prior to publication of the magazine. Coursing has access to the recommendations prior to the magazine's publication because the magazine is created in her department and edited by her. PNW's Code of Ethics restricts trading by all of the bank's analysts and portfolio managers and requires their trades to be pre-cleared by the Compliance Department. Coursing least likely violated which of the following CFA Institute Standards of Professional Conduct? Priority of Transactions Diligence and Reasonable Basis Material Nonpublic Information
B is correct because Coursing has not violated Standard V-Investment Analysis, Recommendations, and Actions, as she is not analyzing investments, making investment recommendations, or taking investment actions for clients. Coursing has violated Standard VI(B)-Priority of Transactions as clients of the bank have not been given priority over investment transactions in which a member or candidate is the beneficial owner. In addition, Coursing violated Standard II(A)-Material Nonpublic Information by trading on material nonpublic information. The Investment Monthly article written by PNW is considered nonpublic until the magazine is widely distributed, and publication of the magazine will materially impact the market price of stocks highlighted. Even though Coursing is not required by her bank to pre-clear her trades, she is restricted from trading by Standard II(A). A is incorrect because Coursing has violated Standard VI(B)-Priority of Transactions as clients have not been given priority over investment transactions in which a member or candidate is the beneficial owner. C is incorrect because Coursing violated Standard II(A)-Material Nonpublic Information by trading on material nonpublic information. The Investment Monthly article written by PNW is considered nonpublic until the magazine is widely distributed, and publication of the magazine will materially impact the market price of stocks highlighted. Even though Coursing is not required by her bank to pre-clear her trades, she is restricted from trading by Standard II(A).
Zhao Xuan, CFA, is a sell side investment analyst. While at a software industry conference, Zhao hears rumors that Green Run Software may have falsified its financial results. When she returns to her office, Zhao conducts a thorough analysis of Green Run. Based on her research, including discussions with some of Green Run's customers, Zhao is convinced that Green Run's reported 50% increase in net income during recent quarters is completely fictitious. So far, however, Zhao is the only analyst suspicious about Green Run's reported earnings. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, the least appropriate action for Zhao is to: report her suspicions to Green Run's management. do nothing until other analysts support her analysis. recommend that her clients sell their Green Run shares immediately.
B is correct because the analyst has conducted thorough research that indicates the company falsified its financial results, and she should request the company address this issue publicly as recommended by Standard II(A)-Material Nonpublic Information. If a member or candidate determines that information is material, the member or candidate should make reasonable efforts to achieve public dissemination of the information. This effort usually entails encouraging the issuer company to make the information public. If public dissemination is not possible, the member or candidate must communicate the information only to the designated supervisory and compliance personnel within the member's or candidate's firm and must not take investment action on the basis of the information. A is incorrect as members and candidates should make reasonable efforts to achieve public dissemination of information that is material and nonpublic. This effort usually entails encouraging the issuer company to make the information public. In this case the original source is not a reliable one, and the analyst would not be expected to request disclosure based upon the rumor, which is not considered material. However, her thorough research indicates that the company falsified its financial results, and she should request the company address this issue publicly. C is incorrect as analysts are in the business of formulating opinions and insights that are not obvious to the general investing public about the attractiveness of particular securities. In particular, under the mosaic theory, as outlined in the Guidance to Standard II(A)-Material Nonpublic Information, an analyst is free to trade based upon information developed in the course of her own research even if this information would have been material inside information had it been communicated directly to the analyst by the company. However, members and candidates should make reasonable efforts to achieve public dissemination of information that is material and nonpublic. This effort usually entails encouraging the issuer company to make the information public, which has not been done in this case, so the analyst would be premature in making a sell recommendation to clients.
All else equal, interest rate risk is lowest for which of the following non-callable bonds? Discount Premium Zero-coupon
B is correct. All else equal, high-coupon bonds have less interest rate risk (lower duration) than low-coupon bonds. Therefore, a bond trading at a premium will have lower interest rate risk than a comparable zero-coupon or discount bond. C is incorrect. All else equal, lower-coupon bonds have higher durations and more interest rate risk, so a zero-coupon bond would have the highest interest rate risk. A is incorrect. All else equal, lower-coupon bonds have higher durations and more interest rate risk, so a discount bond would have higher interest rate risk than a comparable premium bond.
Which of the following conditions would most likely create opportunities for a company to issue low-quality financial reports? A company with an audit committee comprised only of independent board members Government cutbacks in the enforcement branch of the financial regulator Accounting standards that provide few choices
B is correct. Cutbacks in the enforcement branch of the financial regulator could lead to less effective enforcement and oversight of financial issuers, thus creating an opportunity for low-quality financial reporting. A is incorrect. An independent audit committee reduces the opportunity to produce low-quality financial reports. C is incorrect. Accounting standards that do not allow a range of choices reduce the opportunity for low-quality financial reporting.
In countries where employee representatives commonly sit on supervisory boards, the employee representatives are most likely: appointed by the CEO. elected by employees. members of the management board.
B is correct. Employee representatives on supervisory boards are typically elected by the employees. A is incorrect. Employee representatives are typically elected by the employees. C is incorrect. Employee representatives are usually part of the supervisory board, not the management board.
A general ethical decision-making framework will most likely: define a series of actions for each possible situation. facilitate the decision-making process for all decisions. ensure a decision or plan of action does not harm stakeholders.
B is correct. Ethical decision-making frameworks are designed to facilitate the decision-making process for all decisions. They help people look at and evaluate a decision from multiple perspectives, enabling them to identify important issues they might not otherwise consider. A is incorrect because the ethical decision-making process helps facilitate the decision-making process but does not specifically define a series of actions for every possible situation that may arise. C is incorrect because a decision-making framework does not ensure that either a decision or a course of action will safeguard stakeholders. The framework helps one gain a broader perspective so as to create a plan of action that is less likely to harm stakeholders.
A measure of a bond's price sensitivity to a change in the benchmark yield curve at a specified maturity segment best describes: OAS duration. key rate duration. modified duration.
B is correct. Key rate duration (or partial duration) is a measure of a bond's sensitivity to a change in the benchmark yield curve at a specific maturity segment. Key rate duration helps identify a bond's "shaping risk" sensitivity to non-parallel (steepening or flattening) movements in the yield curve. A is incorrect because OAS (option-adjusted spread) duration is an effective duration measure derived from an option-pricing model that is also used to calculate a bond's option-adjusted spread. OAS duration recognizes that when the par curve is shifted parallel in the model, the government spot curve is also shifted, but not in the same parallel manner as the par curve. While OAS duration does capture this curve shift nuance between the par and spot curves, it does not measure a bond's sensitivity to changes in the shape of the benchmark yield curve at a specific maturity segment. C is incorrect because modified duration is a yield duration measure of a bond's price sensitivity to changes in its own yield to maturity rather than to changes in a benchmark yield curve.
Which of the following decisions most likely occurs as part of the index management phase of constructing and managing an index? How to identify which securities should be selected from the target market When to rebalance Which weighting method to use
B is correct. One of the decisions that must be made during the management phase of constructing and managing an index is when to rebalance the index. Rebalancing is necessary to maintain the weight of each security consistent with the index's weighting method. A is incorrect. Identifying which securities to use from the target market is part of deciding how to construct an index and not part of deciding how to manage it. C is incorrect. Choosing the method of weighting to be used in the index is part of the construction of an index process.
A company that prepares its financial statements in accordance with IFRS incurred and capitalized €2 million of development costs during the year. These costs were fully deductible immediately for tax purposes, but the company is depreciating them over two years for financial reporting purposes. The company has a long history of profitability, which is expected to continue. Which is the most appropriate way for an analyst to incorporate the differential tax treatment in his analysis? He should include it in: equity when calculating the company's return-on-equity ratio. liabilities when calculating the company's debt-to-equity ratio. liabilities when calculating the company's current ratio.
B is correct. The different treatment for tax purposes and financial reporting purposes is a temporary difference and would create a deferred tax liability. Deferred tax liabilities should be classified as debt if they are expected to reverse with subsequent tax payments. The long history of profitability implies the company will likely be paying taxes in the following years, and hence an analyst could reasonably expect the temporary difference to reverse. Under IFRS, all deferred tax liabilities are non-current. A is incorrect. It would be included in equity only if there were no expectation of subsequent tax payment, which is not likely given the history of profitability. C is incorrect. Under IFRS, all deferred tax liabilities are non-current, so it would not be included in the current ratio even though it is expected to reverse next year.
During the past 36 months, the standard deviation of a portfolio's monthly returns has been 4.9%. To test a claim that this portfolio's investment strategy results in a standard deviation of monthly returns that is less than 5.0%, the value of the test statistic is closest to: 34.30. 33.61. 34.57.
B is correct. The most appropriate test is chi-square, with 36 − 1 = 35 degrees of freedom. The calculated test statistic is:where χ2 = is the chi-square test statistic n = is the sample size s 2 = is the sample variance = the hypothesized value of the variance σ2 X2 test= (n-1)*(S2/σ2)
Which of the following statements best describes the usual balance sheet presentation of long-term debt? Long-term debt due after one year is presented as multiple line items. Non-current, long-term debt is presented as a single line item. All long-term debt is excluded from classification as a current liability.
B is correct. The non-current (long-term) liabilities section of the balance sheet usually includes a single line item of the total amount of a company's long-term debt due after one year. A is incorrect because the non-current (long-term) liabilities section of the balance sheet usually includes a single line item of the total amount of a company's long-term debt due after one year. C is incorrect because the portion of long-term debt due in the next twelve months is shown as a current liability.
The value of a long position in a forward contract at expiration is best defined as: forward price agreed in the contract minus spot price of the underlying. spot price of the underlying minus forward price agreed in the contract. value of the forward at initiation minus spot price of the underlying.
B is correct. The value of a long position in a forward contract at expiration is defined as spot price of the underlying minus forward price agreed in the contract. A is incorrect. This is the value of a short position. C is incorrect. The value of a long position in a forward contract does not depend on the value of the forward at initiation.
Which of the following is not included in the nine major provisions of the Global Investment Performance Standards (GIPS)? Input Data, Calculation Methodology, and Real Estate Fundamentals of Compliance, Composite Construction, and Disclosure Calculation Methodology, Composite Construction, and Alternative Assets
C is correct because Alternative Assets is not among the nine major provisions or sections of the Global Investment Performance Standards, which include: Fundamentals of Compliance, Input Data, Calculation Methodology, Composite Construction, Disclosure, Presentation and Reporting, Real Estate, Private Equity, and Wrap Fee/Separately Managed Account (SMA) Portfolios.
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C is correct. Cash to income = Cash flow from operating activities (CFO)/Operating income = (1,750/3,390) = 0.52
A European foreign exchange dealer gives the following exchange rate information to a European client: USD/EUR spot rate = 1.1640; three-month forward points = 12.8. The bestinterpretation of the exchange rate information is that: the US dollar is trading at a premium to its forward rate. the three-month US real interest rate is expected to rise. three-month eurozone interest rates are lower than those in the United States.
C is correct. A positive forward premium indicates that the interest rates in the base currency region (eurozone) are lower than the interest rates in the price currency region (United States)
Which of the following is the most appropriate reason for using a free cash flow to equity (FCFE) model to value equity of a company? FCFE models provide more accurate valuations than the dividend discount model. A firm's borrowing activities could influence dividend decisions, but they would not affect FCFE. FCFE is a measure of the firm's dividend paying capacity.
C is correct. FCFE is a measure of the firm's dividend-paying capacity. A is incorrect. The statement that FCFE models provide more accurate valuations than the dividend discount models is not necessarily true. The appropriateness and the effectiveness of a model depend on the firm characteristics and the analyst's ability in making predictions. B is incorrect. A firm's borrowing activities do impact FCFE, as in the expression: FCFE = CFO - FCInv + Net borrowing.
Which of the following is least likely a primary reason a company would raise capital through the issuance of equity securities? To: finance the purchase of long-lived assets maximize the wealth of shareholders directly satisfy stock compensation plans
C is correct. In general, a company will utilize share buybacks to satisfy stock compensation plans. A is incorrect. In most cases, the capital that is raised is used to finance the purchase of long-lived assets, capital expansion projects, research and development, the entry into new product or geographic regions, and the acquisition of other companies. B is incorrect. The primary goal of raising capital is to finance the company's revenue generating activities in order to increase its net income and maximize the wealth of its shareholders.
AMK Corp. purchased US government bonds through the Bloomberg fixed-income electronic trading platform. This transaction is most likely known as: exchange traded. private placement. over-the-counter.
C is correct. In the over-the-counter market, buy and sell orders initiated from various locations are matched through a communication network, such as the Bloomberg fixed-income electronic trading platform. A is incorrect because exchanged-traded deals are transacted through the exchange according to the rules imposed by the exchange. B is incorrect because private placement is a form of primary markets instead of secondary markets for bonds.
A company needs to nominate an independent director for its board of directors. The following candidates are being considered: A retired senior management official of the company A representative of a pension fund that owns 10% of the company's shares A former government employee who was involved in regulating the industry Based on good corporate governance practices, which candidate is the most appropriatenominee? The pension fund representative The retired senior management official The former government employee
C is correct. Independent directors must not have material relationships with the company with regard to employment, ownership, or remuneration. The former government employee best meets these criteria. B is incorrect. The retired senior management officer has been employed by the company and likely still receives remuneration from the company in the form of a pension. He may also be reluctant to be critical of his own prior decisions or those of his co-managers. A is incorrect. The pension fund has a material ownership relationship with the company, so its representative cannot be considered independent.
Which of the following is the least likely reason a company would issue subordinated debt? Subordinated debt is less: expensive than equity. restrictive than secured debt. expensive than senior debt.
C is correct. Issuing subordinated debt is costlier than issuing secured debt because of the increased credit risk inherent in its lower priority of claims. A is incorrect. Issuing subordinated debt is less expensive than issuing equity because debtholders require a lower return than equityholders require. Debtholders have a higher priority of claim in the event of default, which is why they accept a lower return on investment. B is incorrect. Subordinated debt is typically less restrictive than senior debt.
Which is most likely considered a secondary source of liquidity? Centralized cash management system Trade credit Liquidating long-term assets
C is correct. Liquidating long-term assets is a secondary source of liquidity. A is incorrect. Centralized cash management system is considered as a primary source of liquidity. B is incorrect. Trade credit (part of short-term funds) is considered as a primary source of liquidity.
An increase in current prices will most likely: decrease real GDP. increase real GDP. increase the GDP deflator.
C is correct. Nominal GDP is defined as the value of goods and services measured at current prices. Real GDP is not affected by price increases, but nominal GDP and the GDP deflator increase with price increases: Real GDPcurrent year = Nominal GDPcurrent year × 100/GDP deflator Real GDPcurrent year = P base year × Q current year B is incorrect. Real GDP is not affected by the increase in current prices. A is incorrect. Real GDP is not affected by the increase in current prices.
For a 90-day US Treasury bill selling at a discount, which of the following methods most likelyresults in the highest yield? Discount-basis yield (DBY) Money market yield (MMY) Bond equivalent yield (BEY)
C is correct. Note: the face value is greater than the purchase price because the T-Bill sells at a discount. A is incorrect because bond equivalent yield is the highest yield by construction. B is incorrect because bond equivalent yield is the highest yield by construction.
Which of the following errors would most likely be a result of overfitting a machine learning model? Inability to recognize relationships within the training data A predictive model that treats true parameters as if they are noise The discovery of unsubstantiated patterns that lead to prediction errors
C is correct. Overfitting a model can lead to the discovery of unsubstantiated patterns that lead to prediction errors and incorrect output forecasts. A is incorrect. The inability to recognize relationships within the training data most likely results from underfitting the model. B is incorrect. The development of a predictive model that treats true parameters as if they are noise is most likely a result of underfitting the model.
Calculating portfolio duration as the weighted average of time to receipt of the aggregate cash flows: accommodates portfolios that include callable bonds. facilitates the evaluation of the effect of benchmark yield changes on portfolio value. results in a theoretically correct but less commonly used measure of portfolio interest rate risk.
C is correct. Portfolio duration calculated as the weighted average of time to receipt of the aggregate cash flows is the theoretically correct approach but is not commonly used by portfolio managers in practice due to computation and application issues. Portfolio duration calculated as the weighted average of individual bond durations is more commonly used but results in an approximation of the theoretically correct approach. A is incorrect because calculating portfolio duration as the weighted average of time to receipt of aggregate cash flows depends on portfolio cash flow certainty to be effective. Portfolios that contain callable or putable bonds or floating-rate notes lack requisite cash flow certainty for this measure of portfolio duration to be meaningful. B is incorrect because portfolio duration calculated as the weighted average of time to receipt of aggregate cash flows measures the percentage change in portfolio value given a change in cash flow yield (the portfolio's internal rate of return). Changes in the cash flow yield are not necessarily the same as changes in the yield to maturity. Fixed-income managers more commonly interpret interest rate risk relative to changes in benchmark yields rather than the portfolio's cash flow yield.
Replication is most likely used to: reduce portfolio risk. increase leverage. exploit pricing differentials.
C is correct. Replication is the process of creating an asset or portfolio from another asset, portfolio, and/or derivative. It is used to exploit pricing differentials. A is incorrect. Replication is not a technique used to reduce portfolio risk. Other techniques such as hedging or diversification are used to lower portfolio risk. B is incorrect. Replication is not a technique used to increase leverage.
An analysis used to forecast earnings that shows a range of possible outcomes as specific assumptions change best describes which of the following techniques? Scenario analysis Simulation Sensitivity analysis
C is correct. Sensitivity analysis, also known as "what if" analysis, shows the range of possible outcomes as specific assumptions are changed. A is incorrect. Scenario analysis shows changes in key financial quantities that result from given economic events. B is incorrect. Simulation is a computer-generated sensitivity or scenario analysis based on probability models for the factors that drive outcomes.
Compared with public equity markets, which of the following statements is most accurate about private equity markets? Operating in the private market: offers stronger incentives to improve corporate governance. allows more opportunities to raise capital. allows management to better adopt a long-term focus.
C is correct. The management of a public firm is under pressures to meet shorter-term demands, such as meeting quarterly sales and earnings projections from analysts. Private owners are thus better able to focus on longer-term value creation opportunities. A is incorrect. By operating under public scrutiny, companies are incentivized to be more open in terms of corporate governance and executive compensation to ensure that they are acting for the benefit of shareholders. B is incorrect because public equity markets are much larger than private ones.
Which of the following statements relating to the financial reporting of defined contribution pension plans is correct? The only balance sheet impact from contributions to defined-contribution plans is on an asset account. Defined-contribution plans require companies to make several assumptions in order to estimate their pension obligations. Under a defined-contribution plan, company contributions to the plan are treated as an operating cash flow.
C is correct. Under a defined-contribution plan, company contribution to the plan are treated as an operating cash flow. A is incorrect because, if some portion of the agreed-upon contribution has not been paid by fiscal year end, a liability is recognized on the balance sheet. B is incorrect because defined benefit plans (not defined-contribution plans) require companies to make several assumptions in order to estimate their pension obligations.
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A 90-day commercial paper issue is quoted at a discount rate of 4.75% for a 360-day year. The bond equivalent yield for this instrument is closest to: 4.87%. 4.81%. 4.75%.
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A small country has a comparative advantage in the production of pencils. The government establishes an export subsidy for pencils to promote economic growth. Which of the following will be the most likely result of this policy? Although domestic producers will receive a net benefit, the policy will give rise to inefficiencies that cause a deadweight loss to the national welfare. As new domestic producers enter the pencils market, supply will increase and domestic prices will decline. The increase in the domestic producer surplus will exceed the sum of the subsidy and the decrease in the domestic consumer surplus.
https://imgur.com/a/dhdhLhR A is correct. Export subsidies interfere with the functioning of the free market and result in a deadweight loss to society. The deadweight loss arises on the producer side because the higher subsidized price causes inefficient producers to remain in the market. On the consumer side, the higher price causes those that would have purchased at the lower price to be shut out of the market. B is incorrect. Producers shift output from the domestic to the export market to capture the subsidy. Furthermore, as a small country, the domestic market is a price taker and thus consumers pay the international price plus the subsidy causing the domestic price to rise. C is incorrect. As prices rise and producers increase production beyond the efficient level, efficiencies diminish. National welfare must decline, as the increase in producer surplus is less than the combined cost to consumer and government.
According to put-call-forward parity, if the put in a protective put with forward contract expires out of the money, the payoff is most likely equal to: the market value of the underlying asset. zero. the face value of a risk-free bond.
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An investor purchases a 30-year, 5% annual pay bond at 86.24 and plans to sell it in 11 years. Immediately after purchase, interest rates increase by 1%, and they remain at that level until maturity. Assuming coupons are reinvested at the new yield, the investor's realized horizon yield is closest to: 5.67%. 6.0%. 6.13%.
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According to the recommended procedures for compliance with CFA Institute Standard V(C): Record Retention, who is most likely responsible for maintaining the records that support investment actions? The firm Research analysts The chief compliance officer
the firm A is correct. According to the recommended procedures for compliance with CFA Institute Standard V(C): Record Retention, the responsibility to maintain records that support investment action generally lies with the firm, rather than individuals. B and C are incorrect. According to the recommended procedures for compliance with Standard V(C): Record Retention, neither research analysts nor the chief compliance officer is responsible for maintaining records that support investment actions. Members and candidates must, however, archive research notes and documents that support their investment-related communications, all of which belong to the firm. Archiving will assist firms in complying with this requirement for preservation of internal or external records.
