Mock Exam Afternoon
Other things equal, which of the following economic changes is most likely to be associated with an increased trade deficit? A) Increased domestic investment. B) Decreased government spending. C) Increased savings by domestic consumers.
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Marilyn Keeler, CFA, has devised a system for classifying bonds from distressed issuers. Keeler assigns each bond a ranking based on her estimate of its likelihood of default. Group 1 includes bonds that have a probability greater than 50% of defaulting during the next three months. Group 2 includes bonds that are not in Group 1 but that have a probability greater than 50% of defaulting within the next 12 months. Group 3 includes all distressed issuer bonds not included in Groups 1 or 2. The scale that Keeler is using is best described as a(n): A) ordinal scale. B) interval scale. C) nominal scale. Your answer: A was correct!
A was correct! An ordinal scale classifies observations into categories based on a specific characteristic and assigns a number to each category. Unlike an interval scale, an ordinal scale does not imply anything about the differences between categories (i.e., the difference between Group 1 and Group 2 does not have to be the same as the difference between Group 2 and Group 3). A nominal scale does not involve relative rankings of value. (Study Session 3, LOS 7.a)
Brenda Conroy, CFA, is researching whether market share is positively correlated with return on equity among specialty retailers. Conroy selects five companies at random from each of ten groups of specialty retailers (auto parts stores, shoe stores, music stores, etc.). Conroy ranks the sampled companies by market share and by return on equity and conducts a test of the correlation between these firms' market share ranks and their return-on-equity ranks. Conroy's sampling technique and the type of statistical test she is performing are most accurately described as: Sampling technique Type of test A) stratified random sampling nonparametric test B) simple random sampling nonparametric test C) stratified random sampling parametric test
A was correct! Conroy is using stratified random sampling to ensure that each category is represented in the sample. A test that ranks the data in two sets and examines the correlations between ranks is an example of a nonparametric test. (Study Session 3, LOS 10.a, 11.k)
The Global Investment Performance Standards (GIPS) apply to: A) only investment management firms that claim GIPS compliance. B) all investment management firms that employ CFA Charterholders. C) all Members and Candidates, in accordance with the Standard on performance presentation.
A was correct! GIPS are voluntary standards for performance presentation by investment management firms. (Study Session 1, LOS 3.a)
With respect to members and candidates who are involved in distributing shares in oversubscribed initial public offerings (IPOs), the Code and Standards: A) require that these members and candidates not accept shares. B) recommend that these members and candidates not accept shares. C) only permit these members and candidates to accept shares if the firm has disclosed its allocation policies to clients.
A was correct! Guidance for Standard III(B) Fair Dealing states that members and candidates who are involved in distributing oversubscribed IPOs may not withhold shares for themselves. Recommended procedures for compliance with Standard VI(B) Priority of Transactions suggest that members and candidates can avoid conflicts of interest with clients by not participating in IPOs. (Study Session 1, LOS 1.b,c, 2.a,b,c)
As a sample size is increased, which of the following statements best describes the change in the standard error of the sample mean and the size of the confidence interval for the true mean? A) The standard error decreases and the confidence interval narrows. B) The confidence interval widens while the standard error decreases. C) The standard error increases while the confidence interval narrows. Your answer: A was correct!
A was correct! Increasing the sample size will improve the accuracy of the estimated mean. As the sample size increases, both the standard error of the sample mean and the width of the confidence interval decrease. (Study Session 3, LOS 10.f)
Johnson Investment Managers is preparing its presentation and reporting in accordance with GIPS. The firm has been in business for three years. Which of the following statements best describes the requirements for a valid claim of compliance? A) The firm can report composite performance of less than three years. B) The firm cannot claim compliance because GIPS standards require a minimum of five years of performance history. C) The firm should not include firm-specific information beyond what is required by GIPS.
A was correct! Portfolios must be assigned to composites based on pre-established, objective criteria rather than subjectively based on performance after the fact. If the firm or composite has existed for less than five years, compliant performance since inception may be used. Verification is voluntary. A firm can claim GIPS compliance without verification. (Study Session 1, LOS 4.b,d)
The mean return for the population of all stocks on an exchange in the year 20X1 was 5.0%. The mean return from a sample of 20 randomly selected stocks on that exchange in 20X1 was 4.0%. The difference of -1.0% is best defined as the: A) sampling error. B) tracking error. C) standard error of the sample mean.
A was correct! Sampling error is the difference between a sample statistic and its corresponding population parameter. The standard error of the sample mean is the standard deviation of the distribution of the sample means. Tracking error is the difference between the total return on a portfolio and the total return on its benchmark portfolio. (Study Session 3, LOS 9.h, 10.b)
A portfolio's shortfall risk is most accurately described as the probability that the portfolio's return over a given time period is less than: A) a particular target return. B) the risk-free rate. C) the return on a comparable benchmark portfolio.
A was correct! Shortfall risk is the probability that the return (or value) on a portfolio will fall below a target return (or value). (Study Session 3, LOS 9.n)
Which of the following would most likely violate CFA Institute's rules regarding personal integrity and behavior? A) Intentionally understating one's income on a tax return. B) Being arrested for disorderly conduct and spending a night in police custody. C) Filing bankruptcy.
A was correct! Standard I(D) Misconduct states that members shall not engage in any professional conduct involving dishonesty, fraud, deceit or misrepresentation or commit any act that reflects adversely on their honesty, trustworthiness, or professional competence. Personal bankruptcy or a disorderly conduct arrest does not necessarily reflect poorly on professional competence. (Study Session 1, LOS 1.b,c; Study Session 1, LOS 2.a,b,c)
Lyle Goetz, CFA, notifies his employer, Lovell Securities, that he will resign in two weeks. Goetz has accepted an offer to join Lovell's closest competitor. Before leaving Lovell, Goetz: Obtains internal emails that describe ongoing illegal activity by Lovell's management and forwards them to a regulatory authority. Copies a computer program that Goetz wrote for Lovell, which Goetz intends to adapt for personal use but will not share with his new firm. According to the Code and Standards: A) both of these actions are violations. B) neither of these actions is a violation. C) only one of these actions is a violation.
A was correct! Standard IV(A) Loyalty prohibits a member or candidate who is leaving an employer from taking property or information that belongs to the employer without the employer's consent. The computer program is the property of Lovell. Whistleblowing is not a violation of Standard IV(A) if it is done to protect clients or the integrity of the market and not for the member or candidate's own gain. In this case, Goetz clearly intends to gain by his whistleblowing and, therefore, has violated the Standard. (Study Session 1, LOS 1.b,c, 2.a,b,c)
Economies and diseconomies of scale are most likely to determine the shape of the: A) long-run average total cost curve. B) long-run average fixed cost curve. C) short-run average total cost curve.
A was correct! The long-run average total cost curve indicates economies of scale in any output range where it slopes down and diseconomies of scale in any output range where it slopes up. Short-run cost curves are drawn assuming a constant scale of production. All costs are variable in the long run, so there is no long-run average fixed cost curve. (Study Session 4, LOS 15.g)
A member's investment actions in managing a client account are least likely to have a reasonable and adequate basis if they are based on: A) the opinion of a nationally respected investment analyst. B) a report by the firm's research department. C) quantitatively oriented technical analysis designed to rank securities.
A was correct! The opinion of another analyst is least likely to be an appropriate basis for a recommendation. Recommendations must have a reasonable and adequate basis, supported by appropriate research and investigation. Quantitative rankings of securities are acceptable but the member must disclose to clients the basic process used to rank the securities. (Study Session 1, LOS 1.b,c; Study Session 1, LOS 2.a,b,c)
A technical analyst determines that an uptrend in a stock price began at £46 and reached £63. The price chart then showed a triangle pattern with a height of £8 and a price of £58 at the point of the triangle. Based on this chart pattern, the analyst would most likely expect: A) an up move to £66. B) a down move to £50. C) neither a significant up or down move in the near term.
A was correct! Triangles are thought to be continuation patterns. The analyst is likely to expect the previous uptrend to continue and will set a price target from the breakout equal to the size of the pattern: £58 + £8 = £66. (Study Session 3, LOS 12.d)
Alice Waters, CFA, worked for Gramler Advisors for three years as a research analyst but was recently let go as a result of a company reorganization. During her employment, Waters sometimes worked at home on her own time. Waters uses client names from her files to ask for letters of recommendation and uses some of the reports she wrote as examples of her work for prospective employers. Which of these actions violate the Code and Standards? A) Both using the client names and research reports without permission from Gramler. B) Using the research reports without permission from Gramler, but not contacting the clients. C) Contacting firm clients without permission from Gramler, but not using the research reports as examples of her work.
A was correct! Waters has violated Standard V(C) Record Retention and Standard IV(A) Loyalty, both by contacting clients for letters of recommendation and by using the research reports she wrote. Both the client information and the research reports are the property of Gramler, and she violates the Standards by using either of them without permission. (Study Session 1, LOS 1.b,c; Study Session 1, LOS 2.a,b,c)
Rose Worth, CFA, is analyzing the import/export firm Transocean Trading. A large increase in tariffs has been proposed, which Worth believes would reduce Transocean's earnings. Worth speaks with her Congressman, Jerome Horwitz, who tells her that he is certain the tariff increase does not have enough support to become law. Worth distributes a report that says, "Transocean's earnings next year will be within management guidance because the tariff increase will not be enacted." Worth has most likely violated the Standard related to: A) communication with clients. B) preservation of confidentiality. C) material nonpublic information.
A was correct! Worth's statement about the outcome of the legislation and its effect on Transocean's earnings fails to distinguish fact from opinion and thus violates Standard V(B) Communication With Clients and Prospective Clients. Horwitz's "certainty" does not make his prediction a fact. His opinion about the legislation's prospects is not material nonpublic information. Worth did not disclose any confidential client information. (Study Session 1, LOS 1.b,c; Study Session 1, LOS 2.a,b,c)
Monthly returns for a portfolio of stocks are distributed with a mean of 0.5% and a standard deviation of 1.0%. Based on this information an analyst can most accurately conclude that the probability of returns between -1.5% and +2.5% in any given month is at least: A) 68% B) 75% C) 95%
B was correct! Because we do not know the type of probability distribution, we must use Chebyshev's inequality and can state that 1 - ¼ = 75% of the observations will be within two standard deviations of the mean. (Study Session 2, LOS 7.h)
According to consumer choice theory, a decrease in the price of a Giffen good has: A) income and substitution effects that are both negative. B) a positive substitution effect and a negative income effect. C) a positive income effect and a negative substitution effect.
B was correct! For a good to be a Giffen good, a price decrease must have a negative income effect that outweighs the positive substitution effect. (Study Session 4, LOS 14.d,e)
If the skewness of a random variable's distribution is: A) positive, the mode is less than the mean, which is less than the median. B) positive, the mode is less than the median, which is less than the mean. C) negative, the mode is less than the median, which is less than the mean
B was correct! For a positively skewed distribution, the mode is less than the median, which is less than the mean. The opposite is true for a negatively skewed distribution; the mode is greater than the median, which is greater than the mean. (Study Session 2, LOS 7.j,k)
Which of the following statistics is used to test a hypothesis concerning the difference in variances between two normally distributed populations? A) Z-statistic. B) F-statistic. C) Chi-square statistic.
B was correct! Hypothesis tests of the equality of two population variances are F-tests. The z-statistic is used for hypothesis tests concerning the population mean. The chi-square statistic is used for hypothesis tests concerning the variance of a single population. (Study Session 3, LOS 11.j)
Gerri Kocimski, CFA, manages the portfolio of Alfred Tomba. Kocimski sends Tomba a letter requesting an update of Tomba's financial situation. Tomba declines to answer the update questions but sends a check for $1 million, requesting that it be invested in growth stocks. If growth stocks are not suitable for Tomba according to the information Kocimski has on file, Kocimski should most appropriately: A) execute the request because it is an unsolicited trade. B) purchase the growth stocks if Tomba states that suitability is not a concern for this purchase. C) not take any action in Tomba's account unless he receives the updated financial situation.
B was correct! If Kocimski obtains an affirmative statement from Tomba that suitability is not a concern, she may purchase the growth stocks. Kocimski should document her attempt to make a reasonable inquiry into Tomba's financial situation as required by Standard III(C) Suitability. (Study Session 1, LOS 1.b,c; Study Session 1, LOS 2.a,b,c)
If the CFA Institute Designated Officer determines through investigation that a violation of the Code and Standards has occurred and proposes sanctions on a member, and the member rejects these sanctions: A) CFA Institute membership is terminated. B) the matter is referred to a hearing by a panel of members. C) CFA Institute membership is suspended until sanctions are accepted or complied with.
B was correct! If a member rejects proposed sanctions, the matter is referred to a hearing by a panel of CFA Institute members. (Study Session 1, LOS 1.a)
Alvin Mell, CFA, is an investment advisor whose clients include Jack Allen, a famous professional athlete. Allen permits Mell to tell prospective clients that he is one of Mell's clients. In a meeting with a new prospect, Mell truthfully states, "I was able to earn a 15% return for Jack Allen last year." Mell has least likely violated the Standard concerning: A) performance presentation. B) misrepresentation. C) preservation of confidentiality.
B was correct! Mell did not misrepresent past performance or guarantee a future investment performance for the prospect, and thus did not violate Standard I(C) Misrepresentation. However, under Standard III(D) Performance Presentation, Mell's statement is inadequate for representing reasonably expected performance. Even though Mell had Allen's permission to tell prospects that Allen was a client, Mell violated Standard III(E) Preservation of Confidentiality by disclosing Allen's financial details. (Study Session 1, LOS 1.b,c; Study Session 1, LOS 2.a,b,c)
Laura Field, CFA, is a portfolio manager for Valley Investments. Valley owns a significant position in Datatronics, a local company. Most portfolios managed by Valley on behalf of its clients also include Datatronics stock. Field meets with a prospect and discusses potential equities the firm might place in her portfolio, including Datatronics. Field does not mention Valley's position in Datatronics. Field has: A) not violated the Code and Standards. B) violated the Code and Standards by not disclosing the firm's position in Datatronics. C) violated the Code and Standards only if Datatronics stock is placed in the prospect's portfolio.
B was correct! Standard VI(A) Disclosure of Conflicts provides that members must disclose to clients and prospects all matters that reasonably could be expected to impair the member's ability to make unbiased and objective recommendations. The firm's significant ownership of Datatronics stock could reasonably influence Field's decisions. Placing the stock into client portfolios is not in itself a violation. (Study Session 1, LOS 1.b,c; Study Session 1, LOS 2.a,b,c)
Questions 33 through 44 relate to Economics. The spot exchange rate between the U.S. dollar (USD) and the Swiss franc (CHF) is 1.34 USD/CHF. The 1-year riskless interest rate in the United States is 3%, and the 1-year interest rate in Switzerland is 5%. The arbitrage-free 1-year USD/CHF forward rate is closest to: A) 0.761 USD/CHF. B) 1.315 USD/CHF. C) 1.366 USD/CHF.
B was correct! The arbitrage-free one-year forward rate is computed as follows: spot rate × (1 + idomestic) / (1 + iforeign), or 1.34 × (1.03 / 1.05) = 1.3145 USD/CHF. (Study Session 6, LOS 21.h)
The kinked demand curve model of oligopoly is based on a belief that: A) firms will follow the market leader in setting prices. B) a price increase by one firm will likely not be followed by its competitors, but a decrease will. C) one firm has a significant cost advantage and produces a relatively large proportion of the industry's output.
B was correct! The kinked demand curve model is based on the assumption that an increase in a firm's product price will not be followed by its competitors, but a decrease in price will be followed. A firm believes that for price increases above the kink in the demand curve, demand for its product is elastic and the firm will lose market share. (Study Session 4, LOS 16.b,d)
Which of the following actions most likely violates the Standard concerning market manipulation? A) Entering an order to buy a large block of a thinly traded stock whenever its price falls below $10. B) Waiting for a down day in the market to release a ratings downgrade to maximize its impact on a stock's price. C) Posting a company's unexpectedly weak earnings report and negative comments to a popular Internet forum for investors.
B was correct! Timing the release of a ratings downgrade for maximum price impact is an attempt to distort market pricing and violates Standard II(B) Market Manipulation. A limit buy order (an order to buy a stock placed below its current price) does not suggest market manipulation. The Standard prohibits members from disseminating false or misleading information, but not from disseminating factual information as long as the intent is not to distort market pricing or mislead market participants. (Study Session 1, LOS 1.b,c; Study Session 1, LOS 2.a,b,c)
Arguments for being concerned with the size of a fiscal deficit relative to GDP least likely include: A) a likely need for higher future taxes. B) higher interest rates due to government borrowing. C) a high proportion of government debt owed to the country's citizens.
C was correct! That a government owes its own citizens much of its outstanding debt is an argument against being concerned about fiscal deficits. Arguments for being concerned about fiscal deficits include the need for higher future taxes and the potential for government borrowing to increase interest rates and crowd out private investment. (Study Session 5, LOS 19.p)
The CFA Institute Standards of Professional Conduct are most likely to include: A) Integrity of the Investment Profession. B) Maintaining and Improving Professional Competence. C) Investment Analysis, Recommendations, and Actions.
C was correct! The requirements that members must "place the integrity of the investment profession and the interests of clients above their own personal interests" and "maintain and improve their professional competence" are part of the Code of Ethics. The seven Standards of Professional Conduct are (I) Professionalism; (II) Integrity of Capital Markets; (III) Duties to Clients; (IV) Duties to Employers; (V) Investment Analysis, Recommendations, and Actions; (VI) Conflicts of Interest; and (VII) Responsibilities as a CFA Institute Member or CFA Candidate. Standard I(D) Misconduct requires that members not engage in conduct that reflects adversely on their professional competence, but does not specifically require that they maintain and improve their competence. (Study Session 1, LOS 1.b,c; Study Session 1, LOS 2.a,b,c)
Which of the following is least likely one of the nine major sections of the Global Investment Performance Standards (GIPS)? A) Input data. B) Private equity. C) Reporting requirements.
C was correct! "Reporting requirements" is not one of the nine major sections of GIPS. Specific reporting requirements are included in many of the individual sections, which include Private Equity and Input Data. (Study Session 1, LOS 4.d)
Chrome Fund has an expected return of 12%. Nickel Fund is expected to provide an excess return of 8%. Standard deviations of returns are 5% for Chrome Fund and 4% for Nickel Fund. The risk-free rate is 2%. Based on the Sharpe ratio, a rational investor should: A) prefer Chrome Fund to Nickel Fund. B) prefer Nickel Fund to Chrome Fund. C) be indifferent between Chrome Fund and Nickel Fund.
C was correct! Excess return for Chrome is 12% - 2% = 10%. Chrome's Sharpe ratio is 10% / 5% = 2.0. Excess return for Nickel is given as 8%. Nickel's Sharpe ratio is 8% / 4% = 2.0. An investor should be indifferent between these two funds because they provide the same expected excess return per unit of risk. (Study Session 2, LOS 7.i)
Recommended procedures to comply with the Standard related to fair dealing are most likely to include: A) requiring investment committee approval for all recommendation changes. B) simultaneously informing all investment representatives in the firm about pending recommendation changes. C) publishing personnel guidelines for pre-dissemination that prohibit those who know about a pending recommendation from discussing or acting on it.
C was correct! Recommended procedures for compliance with Standard III(B) Fair Dealing include limiting the number of people in the firm who know that a change in recommendation will be made. Requiring investment committee approval for all recommendation changes is not among the recommended procedures. (Study Session 1, LOS 1.b,c; Study Session 1, LOS 2.a,b,c)
Fiscal policy multipliers suggest that if the government increases both spending and taxes by the same amount, the overall effect on the economy is most likely: A) neutral because the fiscal deficit remains unchanged. B) a decrease in aggregate demand because the autonomous tax multiplier is greater than the government expenditure multiplier. C) an increase in aggregate demand because the government expenditure multiplier is greater than the autonomous tax multiplier.
C was correct! Since the government purchases multiplier is greater than the tax multiplier, an increase in government spending will increase aggregate demand more than an equal-sized tax increase will reduce aggregate demand. (Study Session 5, LOS 19.o)
Kevin Blank, CFA, is a representative for Campbell Advisors. A prospective client inquires about investing in Mexican bonds. Blank assures the client that Campbell can help him with Mexican fixed income investing. In fact, Blank had heard that his colleague, Jon Woller, might have had experience in Mexican bonds. The following day Blank learns that Woller had no such experience. Blank does not correct his earlier statement, and the prospective client invests with Campbell. Blank has: A) not violated the Code and Standards because Blank did not intentionally mislead the prospect. B) only violated the Code and Standards when he learned that his statement was incorrect and did not contact the prospect to explain his error. C) violated the Code and Standards, both when he misrepresented the qualifications of his firm and later, when he learned the truth and failed to contact the prospective client and correct his earlier statement.
C was correct! Standard I(C) Misrepresentation prohibits members from making statements, orally or in writing, that misrepresent the services that they or their firms are capable of providing. Even though Blank's statement was not deliberately false, he did not know whether it was true or not, and this made the statement misleading. Once it was evident that the statement was false, Blank had a duty to contact the prospect and correct the misrepresentation, but did not do so. (Study Session 1, LOS 1.b,c; Study Session 1, LOS 2.a,b,c)
A time-weighted rate of return: A) overstates the return if cash is deposited into a portfolio just before a favorable period. B) is found by calculating the return for each period between significant cash flows and taking the arithmetic mean of these returns. C) is the preferred method of measuring the performance of portfolio managers who do not control the timing of cash flows into or out of their accounts.
C was correct! The time-weighted rate of return is calculated by dividing a performance measurement period into sub-periods based on when significant cash flows occur and computing the product of these returns. Money-weighted returns can be either overstated or understated by the timing of cash flows into or out of a portfolio, which is why the time-weighted rate of return is preferred as a measure of portfolio managers' performance. (Study Session 2, LOS 6.d)
Roommates Dan Finn and Maria Hoffman have an ongoing competition where they pick which sports teams will win each week. This week, the Egrets will play the Seagulls, and the Manatees will play the Seals. Finn picks the Egrets (0.6 probability to win) and Manatees (0.5 probability to win). Hoffman picks the Seagulls and Seals. Which of the following statements is least accurate? The probability that: A) either the Egrets or the Seals will win is 0.80. B) both of Hoffman's teams will win is lower than the probability that both of Finn's teams will win. C) at least one of Hoffman's teams will win is higher than the probability that at least one of Finn's teams will win.
C was correct! We calculate the probability that at least one of each person's teams will win using the addition rule for probabilities: P(A or B) = P(A) + P(B) − P(A and B), where P(A and B) = P(A) × P(B) Finn: P(Egrets or Manatees) = 0.60 + 0.50 − (0.6 × 0.5) = 0.80 Hoffman: P(Seagulls or Seals) = (1 − 0.60) + (1 − 0.50) − [(1 − 0.6) × 0.5] = 0.70 Thus, the probability that at least one of Hoffman's teams will win is lower than the probability that at least one of Finn's teams will win. Note that you can obtain the correct answer through logic. Since the probability that either the Manatees or Seals will win is 0.5, the person who selected the team with the highest probability of winning the other game will have the highest "at least one" probability. The other statements are true. The probability that either the Egrets or the Seals will win = 0.6 + (1 − 0.5) − (0.6 × 0.5) = 0.8. The probability that both of Hoffman's teams will win is lower than the probability than both of Finn's teams will win. Here, we will use the multiplication rule to calculate the joint probability of these independent events. Finn: P(Egrets win and Manatees win) = P(Egrets win) × P(Manatees win) = 0.6 × 0.5 = 0.3. Hoffman: P(Seagulls win and Seals win) = P(Seagulls win) × P(Seals win) = (1 − 0.6) × (1 − 0.5) = 0.2. (Study Session 2, LOS 8.f)
The demand function for a good is QD = 400 − 8P, and the supply function is QS = −20 + 4P. If the equilibrium quantity is 120, total surplus is closest to: A) 900. B) 2,700. C) 5,400.
The price at which QD = 0 is: 400 − 8P = 0 P = 400 / 8 = 50 The price at which QS = 0 is: −20 + 4P = 0 P = 20 / 4 = 5 Total surplus = 1/2 × 120 × (50 − 5) = 2,700. (Study Session 4, LOS 13.g,j)
An analyst believes XYZ Company's return on equity (ROE) is highly sensitive to economic growth. She assigns the following probabilities to economic growth and XYZ Company's ROE: Recession Normal Boom Probability 30% 40% 30% ROE 10% 15% 30% XYZ pays out 50% of its earnings as dividends. Based on the data in the table, XYZ's expected growth rate is closest to: A) 9%. B) 12%. C) 18%.
Your answer: A was correct! The expected growth rate is calculated by determining the growth rate for each possible outcome, then multiplying each growth rate by its probability and taking the sum. The growth rate (g) for each outcome is the ROE times the retention rate of 50%. (Note that while this is a Quantitative Methods question, it requires a formula from Equity Investments. On the exam, a concept from anywhere in the curriculum can appear in any section.) grecession = (0.10)(0.5) = 0.05 gnormal = (0.15)(0.5) = 0.075 gboom = (0.3)(0.5) = 0.15 The expected growth rate = (0.3)(0.05) + (0.4)(0.075) + (0.3)(0.15) = 0.09 or 9%. (Study Session 2, LOS 8.l and Study Session 14, LOS 51.h)
The possible outcomes for a random variable are described by a continuous uniform distribution with a lower limit of -15 and an upper limit of +25. The probability that the variable has a negative value is closest to: A) 0.0%. B) 37.5%. C) 60.0%.
Your answer: B was correct! In a continuous uniform distribution with a range from a to b, the probability of an outcome within a smaller range of values is equal to the proportion of that range to b - a. (Study Session 3, LOS 9.i)
The Investment Banking Department of MLB&J often receives material nonpublic information that could have considerable value to MLB&J's brokerage clients. To comply with the Code and Standards, MLB&J should most appropriately: A) ensure that material nonpublic information is not disseminated beyond the firm's investment banking, brokerage, and research departments. B) encourage the firms involved to release the nonpublic information to the public and restrict client trades until they do. C) restrict proprietary trading in the securities of companies about which the Investment Banking Department has access to material nonpublic information.
Your answer: C was correct! One of the recommended compliance procedures for Standard II(A) Material Nonpublic Information is to restrict proprietary trading when in possession of material nonpublic information. Restricting client trades, however, could provide a signal to the market; the firm should continue to accept unsolicited transactions in the securities. There should be an information "firewall" to prevent material nonpublic information received by the investment banking department from being shared with the brokerage and research departments. (Study Session 1, LOS 1.b,c; Study Session 1, LOS 2.a,b,c)
