Kaplan 5 and 6 (Part 1)

A researcher is testing the null hypothesis that the mean quarterly return on a broad-based index of 100 stocks is less than or equal to 1%. She is using 50 quarters of index return data with a mean of 1.406% and a sample standard deviation of 1.74%. The p-value of the appropriate test statistic is closest to:

(0.01406 - 0.01) / (0.0174 / sq rt(50)) = 1.65 90% CI but one tail, so 95% -> answer is 5%

For a firm that reports its long-term debt at market value, a decrease in the rating on its long-term debt will:

A decrease in the firm's bond rating will increase the required yield on its debt and decrease its market value. A decrease in the market (and book) value of its debt will decrease the firm's reported debt-to-assets ratio (a solvency ratio). A decrease in balance sheet liabilities will increase equity as long as assets are unchanged.

Using a production function approach, an increase in which of the following is a source of economic growth?

Amount of capital available. The production function approach views economic growth as a function of the size of the labor force, the amount of capital available, and the productivity of labor and capital.

Which of the following is most accurately described as a coincident economic indicator?

An index of domestic industrial production.

Under which of the following exchange rate regimes do the actions of a country's monetary authority keep the domestic currency closest to its stated target exchange rate with another currency?

Currency board. Under a currency board arrangement, the monetary authority agrees to exchange its domestic currency for a foreign currency at a fixed rate. A fixed peg arrangement allows variation within a band of ±1% around the target exchange rate. With dollarization, a member country does not have a domestic currency of its own.

Kapustin, Inc., increased its valuation allowance on certain deferred tax assets between 20X6 and 20X7. It also recognized a tax loss carryforward on its financial statements in 20X7; it did not recognize any in 20X6. What effects on Kapustin's reported earnings in 20X7 will result from each of these two transactions?

Decrease Valuation Allowance (DTAs) Increase Tax Loss Carryforward (increased yoy)

Phillip Kevil, CFA, is an investment advisor for Sensible Investments Inc. One of Kevil's clients, Alan Miller, has requested that Kevil purchase shares of LongShot Technology through a broker that charges higher-than-average fees. Miller maintains a nondiscretionary account and makes each investment decision himself. Even though the account is not discretionary, Miller does allow Kevil to vote all proxies for his account. Kevil generally votes the proxies with management since most of the stocks in Miller's account are high-tech companies in which the managers are the largest shareholders. Has Kevil violated any Standards?

Using Miller's choice of broker is not a violation, but Kevil's proxy voting policy is a violation.

Which of the following statements regarding record retention is most accurate?

While members are responsible for retaining research notes and other supporting documents, record retention is generally the responsibility of the firm.

The CFA Institute Standards of Professional Conduct are most likely to include:

Investment Analysis, Recommendations, and Actions.

In the chain of events by which monetary policy affects the economy, which is most likely to have limitations that make a policy action less effective in achieving its desired outcome?

Long-term interest rates change in response to changes in short-term interest rates.

Paula Flint, CFA, has left Global Management to start her own investment management firm. Global uses cash flow return on investment (CFROI) as their primary metric for stock selection and has been a pioneer in this approach with great success. While at Global, Flint wrote a stock screening program that was a significant improvement in identifying companies that could be suitable investments under the CFROI strategy. Flint did not sign a non-compete agreement with Global and did not request permission to use any property of Global after leaving the firm. After leaving the firm, Flint: -solicited her former clients and told them that she would be using the same strategy as Global in her stock selection at the new firm. -used the knowledge she acquired while at Global to select high CFROI stocks that also fit other criteria correlated with subsequent outperformance. -used a copy of the screening program she wrote while at Global at her new firm. Did any of these actions violate the Standards?

Only one of these actions violated the Standards. Although she wrote the screening program herself, she created it as an employee of Global and may not take it with her without written permission from Global.

According to which model(s) of international trade will owners of the less-abundant factor of production in each country be made worse off by the lifting of trade restrictions?

The Hecksher-Ohlin model. Labor and capital are factors in the Hecksher-Ohlin model, which suggests that increased international trade will increase the price of whichever factor is more abundant in a country and decrease the price of the less abundant factor.

To comply with the Standard on material nonpublic information, is it permissible for a research analyst for a large, multiservice firm, who has responsibility for issuing investment recommendations on a company, to assist the investment banking side during a transaction with that company?

The Member or Candidate may provide limited assistance under tight controls.

John Samson estimates the probability of selecting two red kings in two random draws from a standard deck of cards (52 cards, only two red kings) as (2/52)(1/51). This estimate is best described as a(n):

This is an a priori probability because it is known in advance by reasoning, without performing any experiments or making any estimates.

Bill Jackson, CFA, has established his own investment management firm. Jackson uses cost-benefit analysis to determine whether to vote proxies, and he informs his clients and prospects of this policy. Is Jackson in compliance with the Code and Standards?

Yes. According to Standard III(A) Loyalty, Prudence, and Care, if the costs of voting certain proxies exceed the benefits, the member or candidate can establish a policy to not vote all proxies. The member or candidate is required to inform clients of the proxy voting policy. Jackson has met these requirements and has not violated any Standards.

A researcher constructs a hypothesis test to determine whether the abnormal returns to an investment strategy are positive. Using 60 months of data, he has found the average monthly abnormal returns for the strategy to be 1.1% with a standard deviation of 4.75%. Based on these results, the researcher would reject the null hypothesis at:

a 5% significance level but not a 2.5% significance level. The null hypothesis is that mean abnormal monthly returns are less than or equal to zero, and the alternative is that monthly abnormal returns are greater than zero. This is a one-tail test and the sample size is large, so the critical value is 1.645 for a 5% significance level or 1.96 for a 2.5% significance level. The test statistic is: 0.011 / (0.0475/√60) = 1.79

Lewis Equipment Company manufactured a construction crane with an estimated useful life of 20 years and market value of $1 million. Valley Builders leases the crane from Lewis for five years with payments of $100,000 per year. The lease includes an option to buy the crane at the end of the lease. Both parties expect that Valley will exercise the purchase option at the end of the lease term. This lease will be reported on the companies' financial statements as:

a finance lease by Valley and Lewis. because of posible extension

Marshall Hopkins reports data for the Alliance Equity Fund. He states in an information sheet that "Alliance has produced a one-year return of 37%." This result was based on Alliance's best year in the past five. He discloses this in a footnote at the bottom of the information sheet. Hopkins' action is:

a violation of the Standard concerning performance presentation.

For a long-term lease of significant value in which some of the risks or benefits of ownership remain with the lessor, the lessee will report a right-to-use asset and a lease liability in an equal amount on the balance sheet under:

both IFRS and U.S. GAAP.

If a public company reports a non-GAAP (non-IFRS) income measure, a reconciliation of that measure with the most comparable measure under the applicable accounting standards is required by:

both IFRS and U.S. GAAP.

The income statement and statement of other comprehensive income can be combined into a single statement under:

both IFRS and U.S. GAAP.

Primary factors influencing the price elasticity of demand for a product are least likely to include:

changes in consumer price expectations.

In the context of a foreign exchange transaction, the "sell side" refers to the:

currency dealer.

The exchange rate yesterday between the U.S. dollar (USD) and Canadian dollar (CAD) was 0.85 USD/CAD. Today, the exchange rate closed at 0.89 USD/CAD. The U.S. dollar has:

depreciated by 4.5%. Have to make USD the base currency before finding depreciation

Jerry Johnson, CFA, has been asked to write a research report on Luke's Lockers, a leading shoe manufacturer. Johnson's wife owns 5,000 shares of Luke's stock. To comply with the Code and Standards, Johnson's most appropriate action is to:

disclose this ownership of the stock in the research report.

Cash received from issuing long-term debt or stock is considered a

financing cash flow.

When expansionary fiscal policy results in reduced capital investments by firms, it is most likely that:

fiscal deficits have resulted in a crowding-out effect. The crowding-out effect is when the government runs a deficit and must borrow more, which increases the demand for loanable funds. This causes interest rates to increase. At the higher rates, firms invest less in physical capital. The effect of expansionary fiscal policy is reduced by the crowding-out effect.

A simple linear regression model assumes that the model's residuals:

have a constant variance.

In an economy experiencing an inflationary gap:

output is greater than potential output. Inflationary gap refers to a short-run macroeconomic equilibrium above full employment.

Master Machines bought a customer list from a competitor leaving the market. The list has an estimated economic life of five years and no residual value, and it is recorded as an intangible asset. A year later, industry changes lead Master to reduce the list's remaining useful life to two years. This change in the useful life will most likely result in:

higher amortization expense in the next year but no restatement of historical financial statements.

An analyst wants to illustrate the dispersion of a country's quarterly GDP growth rates over the last 60 years. The analyst should most appropriately employ a:

histogram. (Want to see frequency)

A member is hired to write a research report on a company that is paid for by the company with a flat fee and fixed bonus if the firm's shares become more widely held. The member is:

in violation of the Standards even if both the funding source and the nature of the compensation are disclosed

John Bobson states: "By imposing a tariff on a good, a country can increase its own economic welfare and, when the tariff revenue is included in the calculation, increase global economic welfare as well." Bobson's statement is:

incorrect. (tariff never helps global economic welfare) While under specific conditions a country that is a large importer of a good can increase its own economic welfare and that of other importing countries by imposing a tariff that decreases the world price of the good, imposing a tariff does not increase global economic welfare under any circumstances. For one or more countries to benefit from the imposition of a tariff, it must be the case that any net gains in economic welfare are offset by an even greater welfare loss in the exporting countries.

Interest incurred by a company as part of constructing an asset over multiple accounting periods is least likely to be included on the income statement in:

interest expense.

A user of financial statements should most appropriately interpret an auditor's disclaimer of opinion to mean the auditor:

is unable to express an opinion about the financial statements.

Juan Perez, CFA, is an airline industry analyst. Perez does not currently cover New Jet, a relatively new airline. New Jet believes its new service is unique and has offered first class tickets to research analysts in the hopes of receiving increased coverage. Perez believes he can more fully understand the airline's new concept if he is a passenger, so he accepts a ticket and takes a weekend trip. Perez does not see any differentiation between New Jet and other airlines, and decides the company is too small to warrant analytical coverage. According to the Code and Standards, Perez is:

permitted to accept the airline tickets, and is not required to obtain written permission from his employer.

Wendy Johnson, CFA, has recently been hired as a portfolio manager for Smith Brothers, an investment firm that caters to institutional clients. For the past five years, Johnson has provided investment advice to a local university endowment fund and received football tickets and parking in return. Johnson does not disclose this arrangement to her supervisor at Smith Brothers because the time involved will in no way interfere with her duties in her new position. Johnson has most likely:

violated the Standards by not obtaining permission from her employer.

It is most likely that the aggregate demand curve slopes downward because at higher domestic price levels:

net exports decrease.

A country's statistical bureau reports a GDP deflator of 106.5. An analyst should interpret this statistic to mean that since the base period:

nominal GDP has increased 6.5% relative to real GDP. Base year is the real rate from the base period, not necessarily the previous year

For a finance lease, on the lessee's balance sheet, the right-of-use asset and the lease liability have equal values:

only at the beginning and the end of the lease.

Free cash flow to equity is best approximated by:

operating cash flow − fixed capital investment + net borrowing.

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:

restrict proprietary trading in the securities of companies about which the Investment Banking Department has access to material nonpublic information.

Under IFRS, for a firm that sponsors a defined benefit pension plan, pension expense is best described as consisting of:

service cost, past service costs, and interest income or expense.

A company that wants to increase its reported net income for the current period would be least likely to:

slow down their payments to suppliers. Slowing payments to suppliers will not affect net income (other than to decrease it if finance charges or failure to take advantage of discounts increases expenses) but increases operating cash flow. A decrease in the valuation allowance for a deferred tax asset will increase the net deferred tax asset which will decrease income tax expense. Increasing the useful life of a machine would decrease depreciation expense.

A member or candidate who acquires non-material non-public information during the course of her work would most likely violate the Standards, with respect to this information, by:

telling her husband. Analysts may use non-material non-public information in writing a research report. Standard VI(B) Priority of Transactions specifically prohibits members and candidates from sharing non-public information, learned while performing their duties, with anyone who has an investment account for which the member is considered a beneficial owner.

JiffyCo's tax rate is 40%. JiffyCo purchases a $200 asset with no salvage value which is depreciated on a straight-line basis for four years for tax purposes and five years for financial reporting. At the end of the second year:

the asset's carrying value is greater than its tax base. DTL = $20 * 0.40 = $8

An analyst wants to test the hypothesis that the mean monthly returns are equal on the stocks of two major oil companies, over the last 60 months, assuming that the returns are approximately normal and that the variance of monthly returns is equal for the two stocks. He would most appropriately calculate a test statistic using:

the average of the differences between the monthly returns on the two stocks and the standard deviation of the differences.