CFA Level 1 Mock Exam 11 : 2024 Mock Exam A Session 1:

An analyst gathers the following information about an investment: *Initial investment amount = $100 *Value at the end of Year 1 = $90 *Additional amount invested at the beginning of Year 2 = $10 *Value at the end of Year 2 = $110 The annualized time-weighted rate of return over the 2-year period is closest to: A. −0.5%. B. 0.0%. C. 4.9%.

A. -0.5% Correct because if the investment is for more than one year, take the geometric mean of the annual returns to obtain the time-weighted rate of return over that measurement period. The two annual returns are: Year 1 return = $90/$100 - 1 = 0.9 - 1 = −0.1 and Year 2 return = $110/($90 + $10) - 1 = 1.1 - 1 = 0.1. The time-weighted rate of return is √(0.9 × 1.1) − 1 = −0.00501 ≈ −0.5%.

An analyst gathers the following information about a comany: *Payables turnover = 3 *Receivables turnover = 6 *Inventory turnover = 9 The cash conversion cycle based on a 365-day year is closest to: A. -20 days. B. 12 days. C. 30 days.

A. -20 days because Cash conversion cycle = Days of inventory on hand (DOH) + Days of sales outstanding (DSO) - Number of days of payables; or = Number of days in period / Inventory turnover + Number of days in period / Receivables turnover - Number of days in period / Payables turnover; or = 365/9 + 365/6 - 365/3 = 40.56 + 60.83 - 121.67 = -20.27 ~ -20 days.

An analyst gathers the following information about a company: *ROE = 12% *ROA = 8% *Total asset turnover = 2.0 *Tax burden = 0.4 *Interest burden = 0.8 Pretax margin is: A 10.0% B. 12.5% C. 15.0%

A. 10.0% Correct because Pretax margin = EBT / Revenue; or = Interest burden × EBIT margin. Accordingly, ROA = Tax burden × Interest burden × EBIT margin × Total asset turnover; or Pretax margin = Interest burden × EBIT margin = ROA / (Total asset turnover × Tax burden); or = 8.0% / (2.0 × 0.4) = 10.0%. Pretax margin is defined as profit before tax divided by revenue.

An analyst gathers the following information (in $ thousands) about a company reporting under US GAAP: DEFINED CONTRIBUTION PLAN: *Contributions to defined contribution plan = 1,000 DEFINED BENEFIT PLAN *Contributions to defined benefit plan = 1,500 *Employees' service cost for the period = 1,400 *Interest expense accrued on the beginning pension obligation = 200 *Expected return on plan assets = 400 *Actuarial gains for the period = 100 The pension expense (in $ thousands) reported in the current year is: A. 2,200 B. 2,400 C. 2,500

A. 2,200 because the pension expense would be the sum of the expense for the defined contribution plan and the defined benefit plan: DEFINED CONTRIBUTION PLAN: *Contributions to defined contribution plan = 1,000 DEFINED BENEFIT PLAN *Contributions to defined benefit plan = 1,500 *Employees' service cost for the period = 1,400 *Interest expense accrued on the beginning pension obligation = 200 *Expected return on plan assets = 400 *Actuarial gains for the period = 100 Total expense = 2,200

Over a 4-year period, a portfolio has returns of 10%, −2%, 18%, and −12%. The geometric mean return across the period is closest to: A. 2.9%. B. 3.5%. C. 8.1%.

A. 2.9%. (Look at study guide) Correct because the geometric mean return is: RG = <[∏𝑡=1𝑇(1+𝑅𝑡)]1/𝑇−1[∏t=1T(1+Rt)]1/T−1 where Rt is the annual return. Plugging in the numbers, the geometric mean return is: = [(1 + 0.10) × (1 − 0.02) × (1 + 0.18) × (1 − 0.12)]0.25 − 1 = 0.0286 ≈ 2.9%

An analyst gathers the following information (in € millions) about a company: Year 2: *Cost of Sales = 625 *Inventory = 145 *Accounts Payable = 120 Year 1: *Cost of Sales = 560 *Inventory = 165 *Accounts Payable =135 If all purchases were made on credit, cash paid to suppliers (in € millions) for Year 2 is: A. 620 B. 630 C. 640

A. 620 Correct because cash paid to suppliers is calculated as cost of sales plus (less) increase (decrease) in inventory less (plus) increase (decrease) in accounts payable. In this case, inventory declined by 20 (165 - 145) and accounts payable declined by 15 (135 - 120) so the calculation becomes 625 - 20 + 15 = 620.

An analyst gathers the following information (in € millions) about a company: *Net Income = 125 *Depreciation expense = 22 *Interest expensed and paid = 20 *Capital expenditures = 50 *Working capital expenditures = 25 *Dividends declared and paid = 11 The income tax rate is 25%. Free cash flow to the firm (in € millions) is: A. 87. B. 92. C. 98.

A. 87 Correct because FCFF = 125 + 22 + 20 × ( 1 - 0.25 ) - 50 - 25 = 87. FCFF is calculated as FCFF = NI + NCC + Int × ( 1 - tax rate ) - FCInv - WCInv.

Which of the following accounting actions would increase stockholders' equity in the current period? A. Capitalizing, rather than expensing, a payment B. Increasing the allowance for uncollectible accounts receivable C. Using LIFO rather than FIFO accounting for inventory in an inflationary environment

A. Capitalizing, rather than expensing, a payment

An analyst gathers the following information (in € millions) about three companies operating in the same industry: Company 1: *PP&E = 100 *Total liabilities and shareholders' equity = 600 *Total shareholders' equity = 200 Company 2: *PP&E = 150 *Total liabilities and shareholders' equity = 1,000 *Total shareholders' equity = 500 Company 3: *PP&E = 120 *Total liabilities and shareholders' equity = 800 *Total shareholders' equity = 200 Applying vertical common-size balance sheet analysis, which company has the highest PP&E? A. Company 1 B. Company 2 C. Company 3

A. Company 1 Company 1: *PP&E = 100 *Total liabilities and shareholders' equity = 600 *Total shareholders' equity = 200 *Total liabilities [= (Total liabilities + Total shareholders' equity) - Total shareholders' equity] = 400 *PPE as % of total assets= 17% *PP&E as % of total shareholders' equity = 50% *PP&E as % of total liabilities = 25% Company 2: *PP&E = 150 *Total liabilities and shareholders' equity = 1,000 *Total shareholders' equity = 500 *Total liabilities [= (Total liabilities + Total shareholders' equity) - Total shareholders' equity] = 500 *PPE as % of total assets = 15% *PP&E as % of total shareholders' equity = 30% *PP&E as % of total liabilities = 30% Company 3: *PP&E = 120 *Total liabilities and shareholders' equity = 800 *Total shareholders' equity = 200 *Total liabilities [= (Total liabilities + Total shareholders' equity) - Total shareholders' equity] = 600 *PPE as % of total assets = 15% *PP&E as % of total shareholders' equity = 60% *PP&E as % of total liabilities = 20% Applying vertical common-size balance sheet analysis, Company 1 has the highest PP&E (17%).

To reduce inflation, a central bank most likely implements an interest rate policy that is: A. contractionary. B. neutral. C. expansionary

A. Contractionary because when central banks believe that economic activity is likely to lead to an increase in inflation, they might increase interest rates, thereby reducing liquidity. In these cases, market analysts describe such actions as contractionary.

If interest is tax deductible, as the tax rate increases, the after-tax cost of debt for a company: A. decreases. B. remains the same. C. increases.

A. Decreases Correct because referencing the equation rd(1 - t), if t increases, the after-tax cost of debt decreases. If interest can be deducted in full, the tax deductibility of debt reduces the effective marginal cost of debt to reflect the income shielded from taxation and the marginal cost of debt is rd(1 - t).

The use of neural networks to identify patterns through multistage, non-linear data processing best describes: A. deep learning. B. supervised learning. C. unsupervised learning.

A. Deep learning Correct because in deep learning, (or deep learning nets), computers use neural networks, often with many hidden layers, to perform multistage, non-linear data processing to identify patterns. Deep learning may use supervised or unsupervised machine learning approaches. By taking a layered or multistage approach to data analysis, deep learning develops an understanding of simple concepts that informs analysis of more complex concepts.

Which of the following ratios is most appropriate for evaluating a company's ability to meet short-term obligations? A. Defensive interval B. Financial leverage C. Working capital turnover

A. Defensive interval because liquidity ratios measure a company's ability to meet its short-term obligations, and the defensive interval ratio is a liquidity ratio that measures how long the company can continue to pay its expenses from its existing liquid assets without receiving any additional cash inflow

Simon Jensen, CFA, a portfolio manager, participates in an IPO of PT Tech. Jensen prorates the oversubscribed issue on an odd-lot basis to suitable clients. After the successful IPO, his colleague Todd Durkny, a CFA candidate, initiates coverage of PT Tech and sends her "buy" recommendation to all clients by email. She then calls her premium fee-paying clients to discuss PT Tech in-depth. Whose actions are consistent with the Standards? A. Durkny's only B. Jensen's only C. Both Durkny's and Jensen's

A. Durkny's only Correct because according to Standard III (B), Fair Dealing, members and candidates may provide more personal, specialized, or in-depth service to clients who are willing to pay for premium services through higher management fees or higher levels of brokerage.

Which of the following best represents the potential for misaligned interests between shareholders and board directors when director tenures are excessively long? A. Entrenchment B. Empire building C. Excessive risk taking

A. Entrenchment because if we consider the typical elements of management compensation, we can identify common examples of misalignment or conflicts including entrenchment. When the overall level of board director or manager compensation, or tenure, is excessive, the result may lead to the avoidance of risk motivated by a vested interest in keeping one's position. In such a scenario, directors may avoid speaking out against management in the interest of shareholders or other stakeholders.

With respect to ESG factors, stranded assets are most likely categorized as a(n): A. environmental factor. B. social factor. C. governance factor.

A. Environmental factor Correct because environmental factors that are generally considered material in investment analysis include natural resource management, pollution prevention, water conservation, energy efficiency and reduced emissions, the existence of carbon assets, and adherence to environmental safety and regulatory standards. A specific concern among investors of energy companies is the existence of "stranded assets," which are carbon-intensive assets at risk of no longer being economically viable because of changes in regulation or investor sentiment.

Which of the following statements regarding the GIPS standards is most accurate? A. Firms can claim compliance on a specific composite B. Claiming compliance with the GIPS standards is voluntary for firms C. Compliance with the GIPS standards is mandatory for asset owners that report to a regulatory authority

A. Firms can claim compliance on a specific composite Correct because for firms complying with the GIPS standards is voluntary.

Which of the following is most likely found in the management commentary? A. Forward-looking disclosures B. Basis of preparation for the financial statements C. Reasonable assurance whether the financial statements as a whole are free from material misstatement

A. Forward-looking disclosures because the management commentary, or MD&A, is a good starting place for understanding information in the financial statements. In particular, the forward-looking disclosures, such as those about planned capital expenditures, new store openings, or divestitures, can be useful in projecting a company's future performance.

Can an asset management firm who follows the GIPS standards for only selected performance composites claim that it is in compliance with the GIPS standards? A. No B. Yes, but only if it uses the return calculation requirements of the GIPS standards for all composites C. Yes, but only if those composites meet the performance reporting requirements of the GIPS standards

A. No Correct because compliance with the GIPS standards is a firm-wide process that cannot be achieved or claimed for just a single product or for selected composites. To be eligible to claim compliance, an asset management firm must fully comply with all requirements of the GIPS standards.

Based on his superior return history, Gupta, CFA, interview by the Church to manage the church's voluntary retirement plan's equity portfolio. Each staff chooses to opt in or out of the retirement plan according to own investment objectives. The plan trustees tell him, stocks of companies involve in sale of drug, gambling, or firearms aren't acceptable investments w/ constraints of the portfolio. He tells the trustees he can't execute the strategy he applies for other clients w/ restricts & all other accounts hold shares of companies involved in these businesses, he see they have highest alpha. By agreeing to manage account according to the trustees' wishes, does Gupta violate the CFA Institute Standards of Professional Conduct? A. No B. Yes, because the manager was hired based upon his previous investment strategy C. Yes, because the restrictions provided by the Trustees aren't in the best interest of the members

A. No because according to Standard III(A), Loyalty, Prudence, and Care, Gupta's duty of loyalty, prudence, and care is owed to the participants and beneficiaries of the pension plan. As a church plan, the restrictions are appropriate given the objectives and constraints of the portfolio.

Which of the following market structures is characterized by high barriers to entry and products with close substitutes within the market? A. Oligopoly B. Monopoly C. Monopolistic competition

A. Oligophy Correct because entry into oligopoly markets is difficult, with fairly high costs and significant barriers to competition. The products offered by each seller are close substitutes for the products offered by other firms and are highly differentiated through marketing, features, and other non-pricing strategies.

Two mutually exclusive projects have the following cash flows (€) and internal rates of return (IRR): Project 1: IRR = 27.97% Year 0 = -2,450 Year 1 = 345 Year 2 = 849 Year 3 = 635 Year 4 = 3,645 Project 2 IRR = 28.37% Year 0 = -2,450 Year 1 = 345 Year 2 = 849 Year 3 = 1,051 Year 4 = 3,175 Assuming a discount rate of 8% annually for both projects, the best decision for the firm to make is to accept: A. Project 1 only B. Project 2 only C. Both Project 1 and Project 2

A. Project 1 only (Look at study guide) because the NPV of Project 1 is greater than NPV of Project 2. the NPV is calculated by summing the cash flows discounted back to Year 0 at the discount rate. NPV of Project 1 is €1,780.59. 1,780.59=−2,450+345(1.08)1+849(1.08)2+635(1.08)3+3,645(1.08)41,780.59=−2,450+345(1.08)1+849(1.08)2+635(1.08)3+3,645(1.08)4 The NPV of Project 2 is €1,765.36. 1,765.36=−2,450+345(1.08)1+849(1.08)2+1,051(1.08)3+3,175(1.08)41,765.36=−2,450+345(1.08)1+849(1.08)2+1,051(1.08)3+3,175(1.08)4 Because Project 1 has a higher NPV and the projects are mutually exclusive, only Project 1 should be accepted.

Which of the following is best described as a means of influencing another country's decisions without force or coercion? A. Soft power B. Standardization C. Regulatory cooperation

A. Soft power

In which stage of a company's life cycle is cash flow most likely to be negative? A. Start-up B. Growth C. Mature

A. Start-up Correct because early in its life, a company is typically a cash consumer. Investment is required to advance concepts through the prototype stage and into commercial production. Revenues are zero or minimal, and risk of business failure is high. The company must raise capital, and since the timing and potential for cash flow generation are highly uncertain, it will generally raise equity rather than debt.

According to the Standard relating to loyalty, which of the following statements are correct? Statement 1: Members must not deprive their employer of the advantage of their skills and abilities. Statement 2: Members are required to subordinate important personal and family obligations to their work. A. Statement 1 only B. Statement 2 only C. Both Statement 1 and Statement 2

A. Statement 1 only Correct because according to Standard IV(A), Loyalty, in matters related to their employment, members and candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer. Statement 2 is incorrect because the standard does not require members and candidates to subordinate important personal and family obligations to their work. Therefore, only Statement 1 is correct.

Gardner Knight, CFA, is a product development specialist at an investment bank. Knight is responsible for creating and marketing collateralized debt obligations (CDOs) consisting of residential mortgage bonds. In the marketing brochure for his most recent CDO, Knight provided a list of the mortgage bonds from which the CDO was created. The brochure also states "an independent third party, the collateral manager, has sole authority for the selection of all mortgage bonds used as collateral in the CDO." However, Knight met with the collateral manager and contributed to determining the bonds included in the CDO. Knight is least likely to be in violation of which of the following Standards? A. Suitability B. Disclosure of Conflicts C. Communication with Clients and Prospective Clients

A. Suitability because there is no indication that the investment is unsuitable for investors and in violation of Standard III(C), Suitability.

Which of the following statements about prediction intervals is most accurate? All else being equal: A. a smaller standard error of the estimate will result in a narrower prediction interval. B. a smaller variation of the independent variable will result in a narrower prediction interval. C. a larger sample size in the regression estimation will result in a larger standard error of the forecast.

A. a smaller standard error of the estimate will result in a narrower prediction interval. Correct because the better the fit of the regression model, the smaller the standard error of the estimate (se) and, therefore, the smaller standard error of the forecast. Moreover, once we have this estimate of the standard error of the forecast, determining a prediction interval around the predicted value of the dependent variable (Ŷf ) is very similar to estimating a confidence interval around an estimated parameter. The prediction interval is Ŷf± t critical for α/2 sf. Thus, a smaller standard error of the estimate will result in a narrower prediction interval.

If practical, retrospective application is required for a change in: A. accounting policies only. B. accounting estimates only. C. both accounting policies and accounting estimates.

A. accounting policies only. because changes in accounting policies are reported through retrospective application unless it is impractical to do so. Changes in accounting estimates, however, are handled prospectively.

A common capital allocation pitfall is: A. basing investment decisions on earnings per share. B. ignoring sunk costs in the decision-making process. C. incorporating the responses of competitors into the analysis.

A. basing investment decisions on earnings per share. Correct because paying too much attention to short-run accounting numbers can result in a company choosing investments that are not in the long-run economic interests of its shareholders. EPS is an accounting based measure.

An advantage of indirect taxes as a fiscal policy tool is that such taxes: A. can be adjusted almost immediately. B. minimize interference with consumer choices. C. have a greater impact on aggregate spending and output than direct government spending.

A. can be adjusted almost immediately

Use of a nonparametric test is most appropriate when the: A. data are given in ranks. B. distribution is symmetrical. C. population variance is unknown.

A. data are given in ranks Correct because nonparametric procedures are primarily used in three situations: when the data are given in ranks, when the data do not meet distributional assumptions, or when the hypothesis being addressed does not concern a parameter.

John McCay, CFA, is an analyst who has prepared a report on the cable industry based on research from a variety of sources and analysts. He compiles these findings to form his own opinion and distributes the report to clients without acknowledging his sources. McCay has violated the Standards by: A. failing to cite the work of others. B. failing to have a reasonable basis for his conclusions. C. incorporating other analysts' research into his own work

A. failing to cite the work of others. because according to Standard I(C), Misrepresentation, in order to prevent plagiarism, members and candidates may use and distribute other sources' research as long as they do not represent themselves as the authors. Members should disclose and cite the sources of their information, so that the client is not misled as to the level of expertise behind the report. One of the most egregious practices in violation of this standard is the preparation of research reports based on multiple sources of information without acknowledging the sources. Therefore, McCay violated this Standard by failing to cite the work of others.

A 12-year old investment firm adopts the GIPS standards. To claim compliance with the GIPS standards, the firm is initially required to present GIPS-compliant performance history: A. for at least five years. B. for at least ten years. C. since the firm's inception date.

A. for at least five years Correct because, according to GIPS, a firm is required to initially present, at a minimum, five years of annual investment performance that is compliant with the GIPS standards. If the firm or the composite has been in existence less than five years, the firm must present performance since the firm's inception or the composite inception date.

For similar amounts, which of the following actions will have the largest effect on GDP? An increase in: A. government spending. B. social transfers to all citizens. C. social transfers to the poorest citizens.

A. government spending Correct because government spending increases have a much bigger effect (six times bigger) on GDP than similar size social transfers because the latter are not considered permanent.

If the threshold level for the portfolio return is greater than the risk-free rate, the portfolio's safety-first ratio is: A. less than its Sharpe ratio. B. equal to its Sharpe ratio. C. greater than its Sharpe ratio.

A. less than its Sharpe ratio. Correct because the safety-first ratio is SFRatio = [E(RP) − RL]/σP and if we substitute the risk-free rate, RF, for the critical level RL, the SFRatio becomes the Sharpe ratio, i.e. Sharpe ratio SR = [E(RP) - RF]/σP. If RL > RF and other variables remain unchanged, then E(RP) - RL < E(RP) - RF, hence SFRatio < SR.

If the target used in computing the target semideviation of an asset's returns is set equal to the mean of the asset's returns, the resulting target semideviation will most likely be: A. less than the sample standard deviation of the asset's returns. B. the same as the sample standard deviation of the asset's returns. C. greater than the sample standard deviation of the asset's returns.

A. less than the sample standard deviation of the asset's returns. because the standard deviation includes all deviations from the mean, not just those below it. Hence the target semideviation is less than the sample standard deviation since target semideviation captures only the downside risk (i.e., deviations below the target). Specifically, the target semideviation is a measure of dispersion of the observations (here, returns) below the target. To calculate a sample target semideviation, we first specify the target. After identifying observations below the target, we find the sum of the squared negative deviations from the target, divide that sum by the total number of observations in the sample minus 1, and, finally, take the square root. If the target is chosen to be the mean return of the asset, the computation described above is identical to that of the sample standard deviation, except that only observations below the mean return will be included for the target semideviation, whereas all observations will be taken for the sample standard deviation. This will result in the target semideviation being smaller than the sample standard deviation.

With respect to hypothesis testing, a test statistic is used to: A. make a statistical decision. B. estimate a population parameter. C. calculate the level of significance.

A. make a statistical decision Correct because a test statistic is a quantity, calculated based on a sample, whose value is the basis for deciding whether or not to reject the null hypothesis. The focal point of our statistical decision is the value of the test statistic.

Li Chen, is a CFA candidate and an equity research analyst at an independent research firm. Chen is contacted by Granite Technologies, Inc., to write an issuer-paid research report on the firm to increase awareness of Granite's stock amongst the investment community. Which statement best represents how Chen should respond to this assignment request? Chen should: A. negotiate a flat fee and disclose this relationship in her report. B. decline to write the report as it will compromise her independence. C. accept long-term warrants on Granite's stock in lieu of any cash compensation.

A. negotiate a flat fee and disclose this relationship in her report. Correct because by negotiating a flat fee, her independence and objectivity would not be questioned as her fee would not be based on the results of her research. In addition, by fully disclosing the relationship in her report she allows the reader to determine if her judgment is compromised. As a result, Chen is maintaining compliance with Standard I(B), Independence and Objectivity.

According to the Standards, if a member cannot discharge supervisory responsibilities due to an inadequate compliance system, the member is: A. only required to decline in writing to accept supervisory responsibility. B. only required to report the inadequate compliance system to CFA Institute. C. both required to decline in writing to accept supervisory responsibility and to report the inadequate compliance system to CFA Institute.

A. only required to decline in writing to accept supervisory responsibility. Correct because according to Standard IV(C), Responsibilities of Supervisor, if the member or candidate clearly cannot discharge supervisory responsibilities because of the absence of a compliance system or because of an inadequate compliance system, the member or candidate should decline in writing to accept supervisory responsibility until the firm adopts reasonable procedures to allow adequate exercise of supervisory responsibility. There is no requirement to report the firm's inadequate compliance system to the CFA Institute.

With respect to transparency, effective central banks: A. outline their view on credit conditions. B. separate control from political influence. C. determine the definition of inflation that they target.

A. outline their view on credit conditions. because one way of establishing credibility is for a central bank to be transparent in its decision making. They will consider and outline their views on the following subjects, usually in this order: Broad money aggregates and credit conditions.

The reversal of an inventory write-down: A. reduces cost of sales. B. increases other comprehensive income. C. is permitted under both IFRS and US GAAP.

A. reduces cost of sales Correct because in each period subsequent to inventory write-down, a new assessment of net realisable value is made. Reversal (limited to the amount of original write-down) is required for a subsequent increase in value of inventory previously written down. The reversal of any write-down of inventories is recognized as a reduction in cost of sales (reduction in the amount of inventories recognized as an expense).

The GBP/EUR (amount of GBP per 1 EUR) spot rate is 0.8992. If the 1-month forward rate is 0.8987, the 1-month forward points are closest to: A. −-5. B. −-0.5. C. ++0.5.

A. −-5. Correct because the conversion of a spot rate into a forward rate is calculated by dividing the number of points by 10,000 (to scale down to the fourth decimal place, the last decimal place in the spot quote) and then add the result to the spot exchange rate quote. Furthermore, most non-yen exchange rates are quoted to four decimal places, so in this case we would scale up by four decimal places (multiply by 10,000) so that this +0.03647 would be represented as +364.7 points. That is, 0.8987 - 0.8992 = - 0.0005. - 0.0005 × 10,000 = -5 points.

An analyst gathers the following exchange rate quotes: *CAD/EUR = 1.0718 *EUR/GBP = 0.9463 *CAD/EUR is the amount of CASH per 1 EUR *EUR/GBP is the amount of EUR per 1 GBP The GBP/CAD (amount of GBP per 1 CAD) cross-rate is closest to: A. 0.8829. B. 0.9860. C. 1.0142.

B. 0.9860 Correct because the GBP/CAD cross-rate is calculated as GBP/CAD = (CAD/EUR)-1 × (EUR/GBP)-1 = (1.0718)-1 × (0.9463)-1 ≈ 0.9860.

A random variable had the following probability distribution: *Probability: 0.10 Outcome: 10 *Probability: 0.80 Outcome: 20 *Probability: 0.10 Outcome: 60 The expected value of the random variable is closest to: A. 20. B. 23. C. 30.

B. 23 because the expected value of a random variable is the probability-weighted average of the possible outcomes of the random variable. For a random variable X, the expected value of X is denoted E(X). Thus, E(X) = (0.10 × 10) + (0.80 × 20) + (0.10 × 60) = 1 + 16 + 6 = 23.

An analyst gathers the following information about a company's capital structure: *Debt (tax-deductible) = 40% *Equity = 60% *Before tax cost of debt = 4% *Cost of equity = 9% If interest is tax-deductible and the marginal tax rate is 30%, the company's WACC is closest to: A. 5.51%. B. 6.52%. C. 7.00%.

B. 6.52% (Look at study guide) WACC = wdrd(1 - t) + wprp + werewherewd = the proportion of debt that the company uses when it raises new fundsrd = the before- tax marginal cost of debtt = the company's marginal tax ratewp= the proportion of preferred stock the company uses when it raises newfundsrp = the marginal cost of preferred stockwe = the proportion of equity that the company uses when it raises new fundsre = the marginal cost of equity WACC = (0.40)(0.04)(1- 0.30) + (0.6)(0.09) = (0.016)(0.07)+(0.054) = 0.0652 = 6.52%.

An analyst gathers the following information (in $ millions) about three companies: COMPANY 1: *Cash = 2.5 *Short-term marketable instruments = 4.0 *Receivables = 2.0 *Inventory = 1.0 *Current liabilities = 5.0 COMPANY 2: *Cash = 2.0 *Short-term marketable instruments = 1.0 *Receivables = 2.0 *Inventory = 1.0 *Current liabilities = 2.5 COMPANY 3: *Cash = 1.5 *Short-term marketable instruments = 1.0 *Receivables = 1.0 *Inventory = 3.0 *Current liabilities = 2.0 Based on the quick ratio, which company exhibits the lowest liquidity risk? A. Company 1 B. Company 2 C. Company 3

B. Company 2 because Company 2 has the highest quick ratio. Quick ratio = (Cash + Short-term marketable instruments + Receivables) / Current liabilities The following is calculated in $ millions: Company 1 quick ratio = (2.5 + 4.0 + 2.0) / 5.0 = 1.70 Company 2 quick ratio = (2.0 + 1.0 + 2.0) / 2.5 = 2.00 Company 3 quick ratio = (1.5 + 1.0 + 1.0) / 2.0 = 1.75

A process to take a private company public without the use of an underwriter is a(n): A. IPO. B. direct listing. C. acquisition by a special purpose acquisition company.

B. Direct listing because a DL [direct listing] does not involve an underwriter, and no new capital is raised. Instead, the company is simply listed on an exchange and shares are sold by existing shareholders.

Which of the following strategies is least likely to be used by shareholder activists? A. Initiating a proxy battle B. Implementing a poison pill C. Filing a shareholder derivative lawsuit

B. Implementing a poison pill Correct because anti-takeover measures, such as. a shareholder rights plan (also known as a poison pill), reduces the likelihood of an unwanted takeover. Shareholder rights plans enable shareholders to buy additional shares at a discount if another shareholder purchases a certain percentage of the company's shares. These plans are designed to increase the cost to any bidder seeking to take over a company. This is not a strategy used by shareholder activists but by management.

Regarding challenges to ethical behavior, which of the following is not an example of a situational influence? A. Bonuses B. Internal factors C. Loyalty to employer

B. Internal factors Correct because situational influences are external factors, such as environmental or cultural elements, that shape our thinking, decision making, and behavior. Therefore, internal decision making factors does not fall within the definition of situational influences.

Which of the following statements are consistent with the Standard relating to referral fees? Statement 1: A member must disclose the nature of the benefit for referrals of clients and their estimated value. Statement 2: Disclosures of referral fees allow clients to evaluate any partiality shown in any recommendation of services. Statement 3: A member is required to advise the client only after entry into a formal agreement for services of benefits received for the recommendation of services provided by the member. A. Only Statement 1 B. Only Statement 1 and Statement 2 C. Statement 1, Statement 2, and Statement 3

B. Only Statement 1 and Statement 2 Correct because according to Standard VI (C), Referral Fees, the responsibility of members and candidates to inform their employer, clients, and prospective clients of any benefit received for referrals of customers and clients. Such disclosures allow clients or employers to evaluate (1) any partiality shown in any recommendation of services and (2) the full cost of the services. Members and candidates must disclose when they pay a fee or provide compensation to others who have referred prospective clients to the member or candidate. Appropriate disclosure means that members and candidates must advise the client or prospective client, before entry into any formal agreement for services, of any benefit given or received for the recommendation of any services provided by the member or candidate. In addition, the member or candidate must disclose the nature of the consideration or benefit—for example, flat fee or percentage basis, one-time or continuing benefit, based on performance, benefit in the form of provision of research or other noncash benefit—together with the estimated dollar value.

Colleen O'Neil, CFA, manages a private investment fund with a balanced global investment mandate. Her clients insist that O'Neil's personal investment portfolio replicate the investments within their portfolio to ensure them that she is willing to put her money at risk. By undertaking which of the following simultaneous investment actions for her own portfolio would O'Neil most likely be in violation of Standard VI(B), Priority of Transactions? A. Sale of a listed US blue chip value stock B. Participation in a popular frontier market IPO C. Purchase of a UK government bond in the primary market

B. Participation in a popular frontier market IPO Correct because Standard VI(B), Priority of Transactions, dictates that members and candidates give their clients and employer priority when making personal investment transactions. Even when clients allow or insist the manager invest alongside them, the manager's transactions must never adversely affect the interests of the clients. A popular or "hot" IPO in a frontier market is likely to be oversubscribed. In such cases, Standard VI(B) dictates that the manager should not participate in this event to better ensure that clients would have a higher probability of getting their full subscription allotment, even though clients have allowed or dictated she do so.

Marcus Reid, CFA, uses the name "CFA expert" when posting comments on social media. During a conversation with a friend, Reid mentions, "I passed all three CFA exams in three consecutive years." Has Reid violated the Standards? A. No B. Yes, because he uses the name "CFA expert" when posting comments on social media C. Yes, because he mentions, "I passed all three CFA exams in three consecutive years"

B. Yes, because he uses the name "CFA expert" when posting comments on social media Correct because according to Standard VII (B), Reference to the CFA institute, the CFA Designation, and the CFA Program, the member is in violation by tagging his hidden identity with the CFA designation. Given the growing popularity of social media, where individuals may anonymously express their opinions, pseudonyms or online profile names created to hide a member's identity should not be tagged with the CFA designation.

Stephen Ho posts comments on his blog immediately after taking the CFA Level II exam. He strongly expresses his disagreement with CFA Institute on its exam policies and mentions several topic areas not tested on the exam. Has Ho violated the Standards? A. No B. Yes, by mentioning broad topic areas not tested on the exam C. Yes, by expressing his disagreement with CFA Institute on its exam policies

B. Yes, by mentioning broad topic areas not tested on the exam because according to Standard VII(A), Conduct as Participants in CFA Institute Programs, all aspects of the exam, including questions, broad topical areas, and formulas, tested or not tested, are considered confidential until such time as CFA Institute elects to release them publicly. This confidentiality requirement allows CFA Institute to maintain the integrity and rigor of exams for future candidates. Ho mentions the board topic areas not tested on his blog. Therefore, he has violated Standard VII(A).

Gurdeep Singh, CFA, is an analyst with a hedge fund and works closely with his supervisor, Joan Tanner, who earned her CFA designation 20 years ago. Singh becomes aware that Tanner uses her CFA designation even though she no longer pays her membership dues. Tanner uses the designation during several meetings that she and Singh have with the firm's clients and emphasizes that all her team members, including herself, are CFA charterholders. Has Singh violated the Standards? A. No B. Yes, the Standard relating to knowledge of the law C. Yes, the Standard relating to reference to CFA Institute, the CFA designation, and the CFA program

B. Yes, the Standard relating to knowledge of the law because according to Standard I(A), Knowledge of the Law, members and Candidates must not knowingly participate or assist in and must dissociate from any violation of such laws, rules, or regulations. In this case, by staying silent in a client meeting in which he knows false information is being given to a potential investor that could cause harm to that investor, Singh would be seen as assisting Tanner in providing that false information, even though Singh is not actively engaging in the misconduct himself Singh should report her conduct to the fund's compliance department for it to address and should dissociate himself from the activity. By not dissociating himself from Tanner and their meetings with clients, Singh has violated the Standard.

When a company increases its prices, it would most likely experience a decline in sales volume when its products have: A. few substitutes available. B. cheaper substitutes available. C. demand that is relatively price inelastic.

B. cheaper substitutes available. Correct because a company's efforts to pass on inflation through higher prices can have a negative impact on volume if the demand is price elastic, which is the case if cheaper substitutes are available.

According to the recommended procedures for compliance with the Standard relating to performance presentation, members should: A. exclude terminated accounts from performance history. B. consider the knowledge of the audience to whom a performance presentation is addressed. C. use a representative account when presenting the performance of the weighted composite of similar portfolios.

B. consider the knowledge of the audience to whom a performance presentation is addressed. because according to Standard III (D), Performance Presentation, members can meet obligation of the Standard by considering the knowledge and sophistication of the audience to whom a performance presentation is addressed.

Compared to the normal distribution, the lognormal distribution is more appropriate to model asset prices because it: A. has negative skewness. B. has a defined boundary to the left. C. is completely defined by two parameters.

B. has a defined boundary to the left. Correct because the two most noteworthy observations about the lognormal distribution are that it is bounded below by 0 and it is skewed to the right (it has a long right tail). In practice, the lognormal distribution has been found to be a usefully accurate description of the distribution of prices for many financial assets. However, the normal distribution is often a good approximation for returns.

According to the Modigliani-Miller propositions, if there are no taxes, an increase in financial leverage will increase the cost of equity and: A. decrease the WACC. B. have no effect on the WACC. C. increase the WACC.

B. have no effect on the WACC. because in the Modigliani-Miller propositions, an increase in financial leverage will increase the cost of equity, but will not change the WACC in the absence of taxes. The market value of a company is not affected by the company's capital structure. In the absence of taxes, the weighted average cost of capital (WACC), orWACC = wdrd + wprp + were, is unaffected by capital structure.

All else being equal, cash dividends paid to common shareholders result in a: A. lower ROA than if no dividends were paid. B. higher ROE than if no dividends were paid. C. lower net profit margin than if no dividends were paid.

B. higher ROE than if no dividends were paid. because ROE = Net income / Average total equity. The basic components of owners' equity are paid- in capital and retained earnings. Retained earnings include the cumulative amount of the company's profits that have been retained in the company. For retained earnings, a dividend payment is the most common decrease. Declaring and paying cash dividends to shareholders does not change net income but reduces retained earnings thus decreases total equity. As a result, ROE will increase compared to no dividends declared and paid.

Ignoring income taxes, the recognition of an impairment loss on long-lived assets most likely results in a: A. lower quick ratio. B. higher total asset turnover ratio. C. lower cash flow from operations.

B. higher total asset turnover ratio. Correct because the amount of the impairment loss will reduce the carrying amount of the asset on the balance sheet and will reduce net income on the income statement. Total asset turnover = Revenue / Average total assets. While Revenue (the numerator) is unaffected, the reduction of the carrying amount of the equipment (an asset) would lead to a lower average total assets; thus the ratio would increase.

Employing an independent GIPS standards verifier: A. improves the performance record of the firm's investment team. B. increases confidence in the firm's claim of compliance with the GIPS standards. C. shifts responsibility for the firm's claim of compliance with the GIPS standards to the verifier.

B. increases confidence in the firm's claim of compliance with the GIPS standards. Correct because according to the GIPS standards once a firm claims compliance with the standards, they may voluntarily hire an independent third party to perform a verification in order to increase confidence in the firm's claim of compliance.

When a client asks her how she makes investment decisions, Petra Vogler, CFA, tells the client she uses mosaic theory. According to Vogler, the theory involves analyzing public and nonmaterial nonpublic information including the evaluation of statements made to her by company insiders in one-on-one meetings where management discusses new earnings projections not known to the public. Vogler also gathers general industry information from industry experts she has contacted. Vogler violates the CFA Institute Standards of Professional Conduct because of her use of: A. industry expert information. B. one-on-one meeting information. C. nonmaterial nonpublic information.

B. one-on-one meeting information. Correct because Vogler violated Standard II(A), Material Nonpublic Information, by using information not known to the public that is selectively disclosed by company insiders in one-on-one meetings. Earnings estimates would likely be considered material and nonpublic information. Information made available to analysts remains nonpublic until it is made available to investors in general. Under the mosaic theory it is acceptable to use information from industry contacts as long as the analyst uses appropriate methods to arrive at her conclusions.

Which of the following is a recommended procedure for compliance with the Standard relating to additional compensation arrangements? When offering services to a third party outside of a member's employment relationship, the member should: A. report annually to his supervisor any compensation received from third parties. B. provide confirmation of the third-party compensation arrangement to his employer. C. disclose to clients the amount, nature, and duration of all additional compensation arrangements.

B. provide confirmation of the third-party compensation arrangement to his employer. Correct because according to the recommended procedures for compliance with Standard IV (B), Additional Compensation Arrangements, members and candidates should make an immediate written report to their supervisor and compliance officer specifying any compensation they propose to receive for services in addition to the compensation or benefits received from their employer. The details of the report should be confirmed by the party offering the additional compensation, including performance incentives offered by clients. Therefore, when offering services to a third party outside of a member's employment relationship, the member should provide confirmation of the third-party compensation arrangement to his employer.

If a deferred tax asset resulted in the past, but the criteria of economic benefits is not met on the current balance sheet date, the company should: A. perform an impairment test. B. reverse the deferred tax asset. C. establish a valuation allowance.

B. reverse the deferred tax asset. Correct because if a deferred tax asset or liability resulted in the past, but the criteria of economic benefits is not met on the current balance sheet date, then, under IFRS, an existing deferred tax asset or liability related to the item will be reversed.

Assuming perfect capital mobility and a credibly fixed exchange rate, a decrease in a country's default-free interest rate below that of other countries will most likely cause: A. significant inflow of capital to the country. B. significant outflow of capital from the country. C. no significant inflow or outflow of capital for the country.

B. significant outflow of capital from the country. Correct because it is worthwhile to emphasize the basic point by considering what would happen in an idealized world of perfect capital mobility. If the exchange rate were credibly fixed, then any attempt to decrease default-free interest rates in one country below those in another—that is, to undertake independent, expansionary monetary policy—would result in a potentially unlimited outflow of capital because funds would seek the higher return.

All else being equal, an increase in the inventory valuation allowance account in the current reporting period most likely increases the: A. interest coverage ratio. B. working capital turnover ratio. C. days of inventory on hand ratio.

B. working capital turnover ratio. because IFRS state that inventories shall be measured (and carried on the balance sheet) at the lower of cost and net realisable value. In the event that the value of inventory declines below the carrying amount on the balance sheet, the inventory carrying amount must be written down to its net realisable value and the loss (reduction in value) recognised as an expense on the income statement. This expense may be included as part of cost of sales or reported separately. Frequently, rather than writing inventory down directly, an inventory valuation allowance account is used. The allowance account is netted with the inventory accounts to arrive at the carrying amount that appears on the balance sheet. Accordingly, because revenue is not affected by the inventory write-down, the working capital turnover ratio (Revenue / Average working capital) increases (as the denominator decreases, as inventory is part of working capital) by an increase in the inventory valuation allowance account in the current reporting period.

An analyst gathers the following information about a company's given fiscal year ended 31 December: *Net Income = €345,000 *Cash dividends declared and paid on common shares = €100,000 *Cash dividends declared and paid on preferred shares = €45,000 *Common shares outstanding on 1 January = 100,000 If a 2-for-1 common stock split took effect on 1 July, basic EPS is: A. €1.00. B. €1.50. C. €2.00.

B. €1.50. Correct because if the number of shares of common stock increases as a result of a stock dividend or a stock split, the EPS calculation reflects the change retroactively to the beginning of the period. The formula for calculating basic EPS is (Net income - Preferred dividends) / Weighted average number of shares outstanding. Since the stock split is treated as if it occurred at the beginning of the period, the weighted average number of common shares outstanding for the year is 200,000 (100,000 outstanding on 1 January × 2). The income available to common shareholders is €300,000 (€345,000 net income − €45,000 preferred dividend paid). Therefore, the calculation becomes €300,000 / 200,000 = €1.50.

An annuity pays €10,000 per year for five years, with the first payment occurring two years from today. If the annual discount rate is 4%, the present value of the annuity today is closest to: A. €41,160. B. €42,806. C. €44,518.

B. €42,806. (Look at study guide) because, first, calculate the present value of a five-year €10,000 ordinary annuity one year from today (at t = 1):Second, discount the present value of the annuity at t = 1 back one year to find the present value at t = 0:Calculator solution: Step 1) PMT = 10,000; I = 4; N = 5; solve for PV = 44,518.22. Step 2) FV = 44,518.22; I = 4; N = 1; solve for PV = 42,805.98 ≈ 42,806.

An analyst gathers the following information (in £ millions) about a company's current assets and current liabilities: *Increase in inventory = 120 *Decrease in accounts receivable = 200 *Increase in accounts payable = 90 Based only on this information, if net income is £850 million, net cash (in £ millions) provided by operating activities is: A. 680. B. 840. C. 1,020.

C. 1,020. Correct because to make the working capital adjustments under the indirect method, any increase in a current operating asset account is subtracted from net income and a net decrease is added to net income. For current operating liabilities, a net increase is added to net income and a net decrease is subtracted from net income. Net cash provided by operating activities = net income - increase in inventory + decrease in accounts receivable + increase in accounts payable = 850 - 120 + 200 + 90 = 1,020. Analyzing Statements of Cash Flows I describe the steps in the preparation of direct and indirect cash flow statements, including how cash flows can be computed using income statement and balance sheet data

The returns of 12 fund managers are ranked in ascending order and numbered from 1 to 12. The location of the second decile is closest to the: A. 1st observation. B. 2nd observation. C. 3rd observation.

C. 3rd observation Correct because the formula for the position (or location) of a percentile in an array with n entries sorted in ascending order is: Ly = (n + 1) × (y / 100), where y is the percentage point at which we are dividing the distribution, and Ly is the location (L) of the percentile (Py) in the array sorted in ascending order. Therefore, the location of the second decile is (12 + 1) × (20 / 100) = 13 × 0.2 = 2.6 ≈ 3. Statistical Measures of Asset Returns calculate, interpret, and evaluate measures of central tendency and location to address an investment problem

An analyst gathers the following information (in £ thousands) about equipment currently in use: *Carrying amount prior to impairment = 600 *Present value of expected future cash flows = 400 *Fair value if sold = 350 *Cost to sell = 20 The carrying amount (in £ thousands) of the equipment after impairment is: A. 330 B. 350 C. 400

C. 400 because IFRS requires the new carrying value to be written down to the higher of its fair value less costs to sell (£330,000 = £350,000 - £20,000) and its value in use (£400,000). The equipment would be written down to the recoverable amount of £400,000, which would be the new carrying amount under IFRS. Under IAS 36, an impairment loss is measured as the excess of carrying amount over the recoverable amount of the asset. The recoverable amount of an asset is defined as the higher of its fair value less costs to sell and its value in use. Value in use is a discounted measure of expected future cash flows. Analysis of Long-Term Assets explain and evaluate how impairment and derecognition of property, plant, and equipment and intangible assets affect the financial statements and ratios

Which of the following statements regarding the Standard relating to record is most accurate? A. In the absence of regulatory guidance or firm policies, members must maintain records for at least five years B. A candidate as an unpaid intern does not need to obtain consent from his previous employer to re-issue research reports at his new firm C. A member is required to maintain third-party reports if they represent supporting documentation of recommendations made by the member

C. A member is required to maintain third-party reports if they represent supporting documentation of recommendations made by the member Correct because according to Standard V(C) relating to record retention, supporting documentation that assists the member or candidate in meeting the requirements for retention include outside research reports. Guidance for Standards I-VII demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations involving issues of professional integrity

Which of the following actions are in violation of the Standard relating to market manipulation? Action 1: Securing a dominant position in a financial instrument with an intent to influence the price of a related derivative. Action 2: Entering large buy and sell trades between multiple proprietary accounts of the firm with the intent to increase trading volume. A. Action 1 only B. Action 2 only C. Both Action 1 and Action 2

C. Both Action 1 and Action 2 Correct because Standard II(B), Market Manipulation, precludes transaction-based manipulation such as securing a controlling, dominant position in a financial instrument to exploit and manipulate the price of a related derivative and/or the underlying asset. So, Action 1 violates the Standard. Also, the Standard precludes other transaction-based manipulation such as attempting to buy and sell the stock using the accounts in hopes of raising the trading volume and the price. So, Action 2 also violates the Standard. Guidance for Standards I-VII demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations involving issues of professional integrity

A analyst studying the Sharpe ratios of mutual funds globally uses only the data from the standard internal database, which covers 12 mutual funds. This sampling method is best described as: A. cluster sampling. B. judgmental sampling. C. convenience sampling.

C. Convenience sampling Correct because in this method (convenience sampling), an element is selected from the population based on whether or not it is accessible to a researcher or on how easy it is for a researcher to access the element. Because the samples are selected conveniently, they are not necessarily representative of the entire population, and hence the level of the sampling accuracy could be limited. By choosing to use all the data from an internal database, the analyst is using convenience sampling. Estimation and Inference compare and contrast simple random, stratified random, cluster, convenience, and judgmental sampling and their implications for sampling error in an investment problem

Florence Zuelekha, CFA, is an equity portfolio manager at Grid Equity Management (GEM), a firm specializing in commodities. Zuelekha, who previously focused on alternative energy, recently attends her first commodity conference, sponsored in large part by GEM. Independent industry experts argued that commodities would increase in value and recommended that investors hold at least 10% of their portfolio assets in commodities based on consistent increases in their values over the previous two years. Without doing any additional research, Zuelekha recommends to all her clients an immediate allocation of 5% of their portfolio into commodities. Over the next few weeks, Zuelekha moves her own portfolio to a 10% commodity allocation. Which of the CFA Standards did Zuelekha violate? A. Priority of Transactions B. Independence and Objectivity C. Diligence and Reasonable Basis

C. Diligence and Reasonable Basis Correct because Standard V(A), Diligence and Reasonable Basis, requires members and candidates to have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action. Relying solely upon attendance at a one-day conference listening to industry experts to make an investment recommendation, especially when the industry experts have based their recommendations upon price data only, would not meet the requirements of the Code and Standards with regard to Diligence and Reasonable Basis. Guidance for Standards I-VII recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct

With respect to geopolitics, which of the following is best described as a financial tool? A. Common markets B. Multilateral trade agreements C. Free exchange of currencies across borders

C. Free exchange of currencies across borders Correct because examples of cooperative financial tools include the free exchange of currencies across borders and allowing foreign investment. Introduction to Geopolitics describe tools of geopolitics and their impact on regions and economies

Credit cycles tend to be: A. shorter than business cycles. B. of the same length as business cycles. C. longer than business cycles.

C. Longer than business cycles Correct because credit cycles tend to be longer, deeper, and sharper than business cycles. Although the length of a business cycle varies from peak to trough, the average length of a credit cycle is mostly found to be longer than that of the business cycle. Understanding Business Cycles describe credit cycles

Which of the following market structures has low barriers to entry? A. A monopoly B. An oligopoly C. Monopolistic competition

C. Monopolistic competition Correct because monopolistic competition has low barriers to entry. The Firm and Market Structures identify the type of market structure within which a firm operates and describe the use and limitations of concentration measures

Meera Doka, CFA, manages an equity fund for clients. One day, the fund experiences a large loss due to an event unforeseen by all market participants. Prior to the event, Doka failed to disclose the risk of this event occurring to her clients. One month later, Doka decides to outsource 5% of the fund's assets to an external manager. She does not inform her clients of this change because the external manager follows an investment process that is very similar to her fund's process. Are Doka's actions consistent with the Standard relating to communication with clients and prospective clients? A. Yes B. No, because she failed to disclose the risk that resulted in the large loss C. No, because she failed to inform her clients about outsourcing 5% of the fund's assets

C. No, because she failed to inform her clients about outsourcing 5% of the fund's assets because it is not consistent with Standard V (B), Communications with Clients and Prospective Clients, to fail to inform clients about the use of an outside manager. A firm's investment policy may include the use of outside advisers to manage various portions of clients' assets under management. Members and candidates should inform the clients about the specialization or diversification expertise provided by the external adviser(s). This information allows clients to understand the full mix of products and strategies being applied that may affect their investment objectives. Guidance for Standards I-VII demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations involving issues of professional integrity

If a firm's supply curve equals its long-run marginal cost schedule, the firm most likely operates in a market structure of: A. oligopoly. B. monopoly. C. perfect competition.

C. Perfect competition Correct because the long-run marginal cost schedule is the perfectly competitive firm's supply curve. In perfect competition, the firm's supply schedule is represented by the marginal cost schedule. The Firm and Market Structures explain supply and demand relationships under monopolistic competition, including the optimal price and output for firms as well as pricing strategy

A member shares information relating to five of his 15 former clients with a tax accountant with whom the member's firm has approved referral fee arrangements. The tax accountant's services are suitable for all of the 15 former clients. The member has violated the Standard relating to: A. fair dealing. B. loyalty, prudence, and care. C. preservation of confidentiality.

C. Preservation of confidentiality Correct because Standard III(E), Preservation of Confidentiality, protects the confidentiality of client information even if the person or entity is no longer a client of the member or candidate. Therefore, members and candidates must continue to maintain the confidentiality of client records even after the client relationship has ended. The member has, therefore, violated Standard IIII(E) by sharing information relating to five of his former clients with a third-party tax accountant. Guidance for Standards I-VII identify conduct that conforms to the Code and Standards and conduct that violates the Code and Standards

Which of the following financial statement disclosures regarding inventory are required under both IFRS and US GAAP? A. Events leading to a reversal of a write-down B. The amount of any reversal of any write-down C. The amount of any write-down recognized as an expense

C. The amount of any write-down recognized as an expense Correct because both IFRS and US GAAP require disclosure of the amount of any write-down of inventories recognized as an expense during the period. Analysis of Inventories describe the presentation and disclosures relating to inventories and explain issues that analysts should consider when examining a company's inventory disclosures and other sources of information

Peter Levinson, CFA, declared personal bankruptcy due to unpaid medical bills. After losing his receipt for a business dinner, he uses his wife's receipt for a smaller amount from the same restaurant to submit his expense claim. Has Levinson most likely violated the Standards? A. No B. Yes, by declaring personal bankruptcy C. Yes, by using his wife's receipt for his expense claim

C. Yes, by using his wife's receipt for his expense claim Correct because according to the Standard I(D), misconduct, Members and Candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence. And using his wife's receipt for expense claim is a dishonest professional conduct. Ethics Application explain how the practices, policies, and conduct do or do not violate the CFA Institute Code of Ethics and Standards of Professional Conduct

A company must disclose for each class of long-lived assets the amounts of impairment losses recognized in the period and where those losses are recognized on the financial statements under: A. IFRS only. B. US GAAP only. C. both IFRS and US GAAP.

C. both IFRS and US GAAP. because under IFRS, a company must disclose for each class of assets the amounts of impairment losses and reversals of impairment losses recognized in the period and where those are recognized on the financial statements. The company must also disclose in aggregate the main classes of assets affected by impairment losses and reversals of impairment losses and the main events and circumstances leading to recognition of these impairment losses and reversals of impairment losses. Under US GAAP, there is no reversal of impairment losses for assets held for use. The company must disclose a description of the impaired asset, what led to the impairment, the method of determining fair value, the amount of the impairment loss, and where the loss is recognized on the financial statements. Analysis of Long-Term Assets analyze and interpret financial statement disclosures regarding property, plant, and equipment and intangible assets

A member has been asked by her supervisor to write a research report on a company. The member's firm owns options to buy the company's stock. The member's firm does not possess material nonpublic information on the company. According to the Standards, the member should: A. outsource the report to an approved third-party research provider. B. place the stock on a restricted list and provide only factual information about the company. C. disclose in the research report the amount and the expiration date of the options held by her firm in the covered company.

C. disclose in the research report the amount and the expiration date of the options held by her firm in the covered company. because according to the recommended procedures for compliance with Standard VI (A), Disclosure of Conflicts, if a member, a candidate, or a member's or candidate's firm has outstanding agent options to buy stock as part of the compensation package for corporate financing activities, the amount and expiration date of these options should be disclosed as a footnote to any research report published by the member's or candidate's firm. Therefore, if the member's firm owns options to buy the company's stock as part of the compensation for offering corporate finance solutions, the member should disclose in the research report the amount and the expiration date of the options held by her firm in the covered company. Guidance for Standards I-VII recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct

An analyst runs a simple linear regression to test whether the variation in the demand for corn explains the variation in the supply of wheat. In this model, the demand for corn is a(n): A. indicator variable. B. explained variable. C. independent variable.

C. independent variable. Correct because the variation in the demand for corn is being used to explain the variation in the supply of wheat. We refer to the variable whose variation is being used to explain the variation of the dependent variable as the independent variable, or the explanatory variable; it is typically denoted by X. Simple Linear Regression describe a simple linear regression model, how the least squares criterion is used to estimate regression coefficients, and the interpretation of these coefficients

According to the pecking order theory, managers' preference for raising capital is: A. debt, internally-generated funds, public equity offerings. B. internally-generated funds, public equity offerings, debt. C. internally-generated funds, debt, public equity offerings.

C. internally-generated funds, debt, public equity offerings. Correct because the pecking order theory suggests that managers choose methods of financing according to a hierarchy that gives first preference to methods with the least potential information content (internally generated funds) and lowest preference to the form with the greatest potential information content (public equity offerings) which are, in general, closely scrutinized because investors are typically skeptical that existing owners would share ownership of a company with a great future with other investors. In brief, managers prefer internal financing. If internal financing is insufficient, managers next prefer debt, then equity. Capital Structure explain factors affecting capital structure and the weighted-average cost of capital

An argument for a country's high national debt relative to GDP being a concern is when the debt: A. is owed to domestic citizens. B. is used for capital investments. C. reduces private sector investing.

C. reduces private sector investing. Correct because an argument in favour of being concerned is that government borrowing may divert private sector investment from taking place (an effect known as crowding out); if there is a limited amount of savings to be spent on investment, then larger government demands will lead to higher interest rates and lower private sector investing. Fiscal Policy describe roles and objectives of fiscal policy as well as arguments as to whether the size of a national debt relative to GDP matters

Value chain analysis most likely involves identifying the: A. firm's pricing strategy. B. firm's break-even points. C. specific activities carried out by the firm.

C. specific activities carried out by the firm. Correct because value chain analysis provides a link between the firm's value proposition for customers and its profitability. It involves identifying the specific activities carried out by the firm. Business Models describe key features of business models

A company purchases goods for £2,000,000 from various suppliers during its first year of operations. The company bears the inventory risk. The company's sale price includes the cost of sales plus a 20% mark-up. All goods purchased have been sold and delivered to customers by fiscal year-end and all orders are nonrefundable. The company should report revenue of: A. £400,000. B. £1,600,000. C. £2,400,000.

C. £2,400,000. because revenue is recognized when the obligation-satisfying transfer is made. The transaction price is what the seller estimates will be received in exchange for transferring the good(s) or service(s) identified in the contract. The transaction price is then allocated to each identified performance obligation. Revenue is recognized when a performance obligation is fulfilled. Revenue = cost of sales + mark-up = £2,000,000 + 20% × £2,000,000 = £2,000,000 + £400,000 = £2,400,000. Analyzing Income Statements describe general principles of revenue recognition, specific revenue recognition applications, and implications of revenue recognition choices for financial analysis