Practice Exam 2

If an investment of $4,000 will grow to $6,520 in four years with monthly compounding, the effective annual interest rate will be closest to: A) 11.2%. B) 12.3%. C) 13.0%.

13.0%.

Rolly Parker has managed the retirement account funds for Misto Inc. for the last two years. Contributions and withdrawals from the account are decided by Misto's CFO. The account history is as follows, with account values calculated before same-date deposits and withdrawals: Jan 1, 20X1Beginning portfolio value$ 10 million Jul 1, 20X1Account value$11.2 million Jul 1, 20X1Deposit of cash$1.2 million Jan 1, 20X2Account value$12.5 million Jan 1, 20X2Withdrawal of cash$0.6 million Dec 31, 20X2Account value$15 million The appropriate annual return to use in evaluating the manager's performance is closest to: A) 9%. B) 19%. C) 22%.

19%.

Consider two currencies, the WSC and the BDR. The spot WSC/BDR exchange rate is 2.875, the 180-day riskless WSC rate is 1.5%, and the 180-day riskless BDR rate is 3.0%. The 180-day forward exchange rate that will prevent arbitrage profits is closest to: A) 2.833 WSC/BDR. B) 2.854 WSC/BDR. C) 2.918 WSC/BDR.

2.854 WSC/BDR.

Wells Investments implements a new procedure for unsolicited trade requests that an advisor believes are inconsistent with the client's IPS: If the trade will have only a minimal impact on the client's portfolio, first advise the client in what way the trade deviates from the IPS, and then request the client's approval for the trade. If the trade will have a material impact on the risk and return characteristics of the client's portfolio, discuss with the client that this trade will require a change in the IPS. Which of these statements is consistent with the standard concerning suitability? A) Both of these statements. B) Neither of these statements. C) Only one of these statements.

Both of these statements.

Which of the following statements about the analysis of cash flows is least accurate? A) Interest payments on debt are not a financing cash flow under U.S. GAAP. B) Both the direct and indirect methods involve adding back noncash items such as depreciation and amortization. C) When using the indirect method, an analyst should add any losses on the sales of fixed assets to net income.

Both the direct and indirect methods involve adding back noncash items such as depreciation and amortization.

Fred Reilly, CFA, is an investment advisor. Roger Harrison, a long-term client of Reilly, decides to move his accounts to a new firm. In his review of Harrison's account history, Reilly discovers some transfers of funds from the account of Harrison's company that Reilly suspects were illegal. Which of the following actions is most appropriate for Reilly to take under the Standards? A) Discuss his suspicions with outside counsel. B) Inform Harrison's company of the suspected illegal activities because Harrison is no longer a client. C) Do nothing because he must maintain the confidentiality of client information even after the client has left the firm.

Discuss his suspicions with outside counsel.

Groux Limited has 30-year EUR 25 million floating-rate notes outstanding, with coupon interest payable at a market reference rate plus 125 basis points. If shortly after issuance the market reference rate increased by 10 bps and Groux's credit spread increased by 15 bps, Groux's coupon payment to investors would increase by: A) 10 bps. B) 15 bps. C) 25 bps.

10 bps.

Which of the following statements on the economic implications of trade restrictions is most accurate? A) Quota rents are the amounts received by the domestic government when it charges for import licenses. B) In the importing country, import quotas, tariffs, and voluntary export restraints all decrease producer surplus. C) In the case of a quota, if the domestic government collects the full value of the import licenses, the result is the same as that of a tariff.

In the case of a quota, if the domestic government collects the full value of the import licenses, the result is the same as that of a tariff.

Selected items from the financial statements of three plumbing fixture manufacturers appear in the following table. All three firms use straight-line depreciation for financial reporting. RobbcoSammcoTeddco PP&E at historicalcost$10,000,000$12,000,000$18,000,000Accumulated depreciation6,000,0008,000,0009,000,000 NetPP&E4,000,0004,000,0009,000,000 Depreciation expense (latest period)800,0001,000,0001,500,000 Based only on these data, which firm is most likely to require significant capital expenditures sooner than the others? A) Robbco. B) Sammco. C) Teddco.

Sammco.

One of the benefits to investing in exchange-traded funds (ETFs) rather than open-end funds is that ETFs: A) can be traded at intraday prices. B) are exempt from trading commissions. C) automatically reinvest dividends into additional shares.

can be traded at intraday prices.

Lunar Wealth, a subsidiary of Galaxy Financial, has prepared GIPS- compliant performance data and asks Galaxy's president about his interest in presenting GIPS-compliant performance data, but he does not believe it is a priority. Lunar may: A) claim partial compliance with GIPS if Lunar's performance presentations are in compliance. B) not claim compliance with GIPS because compliance must be made on a company-wide basis. C) claim compliance with GIPS as long as Lunar is presented to the public as a distinct business entity.

claim compliance with GIPS as long as Lunar is presented to the public as a distinct business entity.

Stakeholder theory is most accurately described as the belief that corporate governance should focus on managing: A) the activities of a company in the best interests of its owners. B) employee activities in compliance with ethical standards and applicable laws. C) conflicts among different groups that have an interest in a company's activities.

conflicts among different groups that have an interest in a company's activities.

An investor goes to a bank hoping to get a $200,000 short-term loan. He finds that the bank has increased interest rates and fees on short-term loans and has tightened the requirements for the repayment period. This most likely reflects a shift in the credit cycle that is associated with a business cycle: A) peak. B) expansion. C) contraction.

contraction.

In choosing asset classes for establishing strategic portfolio allocation across assets, the manager would most prefer that: A) asset classes are only those with tradable liquid assets. B) the asset classes span the broadest universe of investable assets. C) correlations of asset returns within an asset class are significantly greater than correlations of asset class returns.

correlations of asset returns within an asset class are significantly greater than correlations of asset class returns.

Time-series analysis of a firm's common-size balance sheets reveals the following data: 20X320X420X5 Currentassets20%22%25% Inventory8%9%11% Short-term debt10%11%12% Long-term debt24%21%18% Based only on the data provided, an analyst can conclude that the firm's: A debt ratio is decreasing. B) quick ratio is decreasing. C) inventory/sales ratio is increasing.

debt ratio is decreasing.

Marie Marshall, CFA, charges clients a management fee and commissions on securities transactions. Marshall receives an annual bonus based on the overall success of the firm and a quarterly bonus based on the trading volume in her clients' accounts. If Marshall does not tell clients about her compensation package, she is violating the Standard concerning: A) disclosure of conflicts. B) communication with clients. C) additional compensation arrangements.

disclosure of conflicts.

Justin Matthews, CFA, is chief financial officer of a bank and serves on the bank's investment committee. The majority of the committee has voted to invest in medium-term euro debt. Matthews feels very strongly that this is a poor strategy and that trends in both the exchange rate and in euro interest rates over the next year will result in large losses on the position. According to the Code and Standards, Matthews should most appropriately: A) document his difference of opinion with the committee. B) express his concerns to the bank's chief executive officer directly. C) dissociate from the recommendation by asking that his name not be included.

document his difference of opinion with the committee.

Voting rights on common shares allow the shareholder to: A) select the company's chief executive. B) vote on whether to declare common dividends. C) elect members to the company's board of directors.

elect members to the company's board of directors.

A company is most likely to have a high proportion of equity in its capital structure if the company exhibits: A) high operating risk. B) a low but stable growth rate of cash flows. C) assets that are primarily marketable securities.

high operating risk.

A company takes a $10 million impairment charge on a depreciable asset in 20X3. The most likely effect will be to: A) increase reported net income in 20X4. B) decrease net income and taxes payable in 20X3. C) increase return on equity and operating cash flow in 20X4.

increase reported net income in 20X4.

According to the crowding-out effect, the sale of government bonds used to finance excess government spending is least likely to: A) increase the real interest rate. B) reduce private investment spending. C) increase the profitability of corporate investment projects.

increase the profitability of corporate investment projects.

Erbdin Company determines that replacing some of its manufacturing equipment with an updated model would decrease its variable cost of production by 15%. Doing so would be best characterized as: A) an expansion project. B) a going concern project. C) a business growth investment.

a going concern project.

From a liquidity management perspective, an increase in the number of days of payables is best described as: A) liquidity neutral. B) a pull on liquidity. C) a source of liquidity.

a source of liquidity.

The public sector is most likely to increase as a proportion of economic output if fiscal policy: A) and monetary policy are both expansionary. B) is contractionary and monetary policy is expansionary. C) is expansionary and monetary policy is contractionary.

is expansionary and monetary policy is contractionary.

If a firm's long-run average total costs increase with its level of output, the firm: A) should shut down in the long run. B) is experiencing diseconomies of scale. C) is operating below its minimum efficient scale.

is experiencing diseconomies of scale.

Katrina Anderson, CFA, left her job as an account manager at RTJ Capital Management and joined Parnell Associates. Anderson did not sign a noncompete agreement at RTJ and took no RTJ property with her when she left. According to CFA Institute Standards of Professional Conduct, Anderson: A) must not harm RTJ by soliciting her previous clients. B) is free to contact her previous clients at RTJ after her employment there ends. C) must seek permission from RTJ before contacting her previous clients there.

is free to contact her previous clients at RTJ after her employment there ends.

Nicholas Hart, CFA, is a portfolio manager for individuals. Last year, Hart's wife was hospitalized for several months. Despite his best efforts to pay her bills, Hart was forced to declare personal bankruptcy but did not disclose this to his clients. According to the CFA Institute Standards of Professional Conduct, Hart: A) is not in violation of any Standard. B) is in violation of the Standard on communication with clients for not disclosing his bankruptcy to his clients. C) is in violation of the Standard on misconduct for personal conduct that reflects adversely on his professional reputation.

is not in violation of any Standard.

Paul James, CFA, a retail stock broker, notices that one client in particular, Chet Young, Ph.D., is especially adept at picking stocks. James decides to replicate Young's trades in his own account after he enters them. By doing so, James: A) is not in violation of any Standards. B) is in violation of the Standard on priority of transactions because he is front running the client's account. C) is in violation of the Standard on misconduct because he has misappropriated confidential client information.

is not in violation of any Standards.

An analyst obtains the following annual returns for a group of stocks: 10%, 8%, 7%, 9%, 9%, 12%, 11%, 9%, 30%, and 15%. This distribution: A) has a mode greater than its median. B) is skewed to the right, and the mean is less than the median. C) is skewed to the right, and the mean is greater than the mode.

is skewed to the right, and the mean is greater than the mode.

Other things being equal, a company is most likely to issue additional debt if: A) the alternative is to rely on internally generated capital. B) doing so will only change its corporate bond rating from BBB to BB. C) it is funding an acquisition that will generate significant cash flows.

it is funding an acquisition that will generate significant cash flows.

In a linear regression model, one of the critical assumptions regarding the residual term is that: A) its distribution is normal. B) its variance exhibits heteroskedasticity. C) residuals for two paired observations are correlated.

its distribution is normal.

The ratio of operating cash flow to net income is most likely to indicate low quality of earnings when it is: A) less than one. B) highly variable. C) increasing over time.

less than one.

With respect to the Standard on material nonpublic information, materiality is least likely to be affected by: A) the source of the information. B) liquidity of the subject security. C) ambiguity about the price effect of the information.

liquidity of the subject security.

A firm that wishes to take a less conservative approach to working capital management is most likely to increase its relative levels of: A) short-term assets, and use more long-term sources to finance working capital. B) short-term assets, and use more short-term sources to finance working capital. C) long-term assets, and use more short-term sources to finance working capital.

long-term assets, and use more short-term sources to finance working capital.

An advantage of the Herfindahl-Hirschman Index (HHI) over the N-firm concentration ratio as a summary measure of the market structure of an industry is that the HHI is more sensitive to: A) mergers. B) barriers to entry. C) elasticity of demand.

mergers.

A market has the following characteristics: a large number of independent sellers, each producing a differentiated product; low barriers to entry; producers facing downward sloping demand curves; and demand that is highly elastic. This description most closely describes: A) an oligopoly. B) pure competition. C) monopolistic competition.

monopolistic competition.

Dawn Shepard, CFA, is a broker for a regional brokerage firm. Her company's research department recently changed its recommendation on the common stock of Orlando (ORL) from "buy" to "sell" and sent the change to all firm clients who own ORL. The next day, a client places a "buy" order for ORL. According to the Standards, under these circumstances, Shepard: A) must advise the customer of the change in recommendation before accepting the order. B) has complied with the fair dealing Standard and may accept the order because it is unsolicited. C) may accept the order only if the customer acknowledges in writing that she was notified of the change in the recommendation.

must advise the customer of the change in recommendation before accepting the order.

Christopher Kim, CFA, is a banker with Batts Brothers, an investment banking firm. Kim follows the energy industry and has frequent contact with industry executives. Kim is contacted by the CEO of a large oil and gas corporation who wants Batts Brothers to underwrite a secondary offering of the company's stock. The CEO offers Kim the opportunity to fly on his private jet to his ranch in Texas for an exotic game hunting expedition if Kim's firm can complete the underwriting within 90 days. According to CFA Institute Standards of Conduct, Kim: A) may accept the offer as long as he discloses the offer to Batts Brothers. B) may not accept the offer because it is considered lavish entertainment. C) must obtain written consent from Batts Brothers before accepting the offer.

must obtain written consent from Batts Brothers before accepting the offer.

An analyst would like to evaluate any sections of a company's financial reports over the last several years to see where the tone of the information provided by management may have a more negative trend than what the market may perceive. To do this using fintech, the analyst is most likely to use: A) word clouds. B) corporate exhaust. C) natural language processing.

natural language processing.

An analyst creates a covariance matrix for four assets in a portfolio. The values she will enter in her matrix can range from: A) zero to one. B) negative one to positive one. C) negative infinity to positive infinity.

negative infinity to positive infinity.

Charmaine Townsend, CFA, has been managing equity portfolios for clients using a model that identifies growth companies selling at reasonable multiples. With economic growth slowing for the foreseeable future, she has decided to change to a securities selection model that emphasizes dividend income and low valuation. To comply with the Code and Standards, Townsend should most appropriately: A) promptly notify her clients of the change. B) get written permission from her clients prior to the change. C) get written acknowledgment of the change from her clients within a reasonable period of time after the change is made.

promptly notify her clients of the change.

Isabelle Burns, CFA, is an investment advisor and holds shares of Torex in her personal account because she thinks it is undervalued. According to the CFA Institute Standards of Professional Conduct, Burns may: A) recommend Torex to clients but must disclose her investment in Torex. B) not recommend Torex to clients while she has a personal investment in the stock. C) recommend Torex to clients for whom it is suitable without disclosing her investment in Torex.

recommend Torex to clients but must disclose her investment in Torex.

A U.S. GAAP reporting company holds a number of marketable securities as investments. For the most recent period, the company reports that the market value of its securities held for trading decreased by $2 million and the market value of its securities available for sale increased in value by $3 million. Together, these changes in value will: A) reduce net income and shareholders' equity by $2 million. B) increase shareholders' equity by $1 million and have no effect on net income. C) reduce net income by $2 million and increase shareholders' equity by ＄1 million.

reduce net income by $2 million and increase shareholders' equity by ＄1 million.

Unlike members of free trade areas, customs union members: A) adopt a single currency. B) remove barriers to trade with all members. C) adopt uniform trade restrictions with non-members.

adopt uniform trade restrictions with non-members.

Judy Dudley, CFA, is an analyst and plans to visit a company that she is analyzing in order to prepare a research report. The Standard related to independence and objectivity: A) requires Dudley to pay for her own transportation costs and not to accept any gifts or compensation for writing the report, but allows her to accept accommodations and meals that are not lavish. B) requires Dudley not to accept any compensation for writing a research report, but allows her to accept company paid transportation, lodging, and meals. C) allows Dudley to accept transportation, lodging, expenses, and compensation for writing a research report, but requires that she disclose such an arrangement in her report.

allows Dudley to accept transportation, lodging, expenses, and compensation for writing a research report, but requires that she disclose such an arrangement in her report.

Open market sales of securities by a country's central bank will most likely result in: A) decreasing short-term interest rates. B) appreciation of the domestic currency. C) an increasing growth rate of real GDP.

appreciation of the domestic currency.

An investor purchased $1,500 of XYZ shares each month over the last four months. The prices paid per share were $20, $22, $24, $26. The average cost per share is closest to: A) $22.50. B) $22.75. C) $23.00.

$22.75.

An analyst gathered the following data about a company: 1,000 common shares are outstanding (no change during the year). Net income is $5,000. The company paid $500 in preferred dividends. The company paid $600 in common dividends. The average market price of their common stock is $60 for the year. The company had 100 warrants (for one share each) outstanding for the entire year, exercisable at $50. The company's diluted earnings per share is closest to: A) $4.42. B) $4.55. C) $4.83.

$4.42.

A company's cash flow statement provides the following data: Net income$580,000 Depreciation110,000 Gain from sale of land(70,000) Increase in receivables(20,000) Decrease in inventories30,000 Decrease in accounts payable(80,000) Increase in unearned revenue liability30,000 Operating cash flows580,000 Notes to the cash flow statement indicate that the total of revenues and gains from the income statement was $987,000. Cash collected from customers during the period is: A) $897,000. B) $907,000. C) $927,000.

$927,000.

If a bond has a convexity of 120 and a modified duration of 10, the convexity adjustment (to a duration-based approximation) associated with a 25 basis point interest rate decline is closest to: A) -2.875%. B) -2.125%. C) +0.0375%.

+0.0375%.

Parker, Inc. has the following securities outstanding: 100,000 shares of preferred stock that pays an annual dividend of $2.00, trading at $35. $5,000,000 face value 6% bonds with a YTM of 6%. 1 million shares of common stock trading at $28 per share. Parker's cost of equity is 8% and its tax rate is 30%. The discount rate that Parker's management should use when evaluating new capital investments is closest to: A) 7.00%. B) 7.25%. C) 7.50%.

7.25%.

The following data apply to a semiannual-pay bond: Maturity5 yearsCoupon6%Price98.05Call price after three years102.00Call price after four years100.00 The yield to first call is closest to: A) 6.73%. B) 7.34%. C) 7.37%.

7.34%.

OrangeCo pays out 40% of its earnings as dividends. Sales are expected to grow at 5% per year for the foreseeable future, while earnings are expected to grow at 3%. Using a required rate of return of 8%, OrangeCo's justified P/E ratio is closest to: A) 8.0. B) 12.0. C) 13.3.

8.0.

An analyst prepares a contingency table for two characteristics, each of which has four categories, and wants to test whether the two characteristics are independent. What are the appropriate degrees of freedom for the test statistic? A) 9. B) 16. C) 25.

9.

Which of the following is most likely an example of aggressive accounting? A) Reducing the salvage value of company vehicles. B) Changing the depreciation policy on company vehicles from accelerated to straight-line. C) Increasing the estimated useful life of company vehicles based on a downward trend in miles driven.

Changing the depreciation policy on company vehicles from accelerated to straight-line.

Which of the following is least likely one of the eight major topics of the Global Investment Performance Standards (GIPS) for firms? A) Composite and Pooled Fund Maintenance. B) Fundamentals of Compliance. C) Conflicts with Local Laws and Regulations.

Conflicts with Local Laws and Regulations.

Which of the following sources of information should an analyst consider the least reliable? A) Form 10-Q. B) Proxy statement. C) Corporate press release.

Corporate press release.

A firm is domiciled in a jurisdiction with a 23% corporate tax rate. The business incurred a profit before tax of $500,000 for the year, had net income of $372,000, and paid $114,000 in tax. Which of the following measures of the firm's tax rate is the highest? A) Cash tax rate. B) Effective tax rate. C) Statutory tax rate.

Effective tax rate.

During a period of decreasing costs of manufacturing, which of the following inventory cost methods results in the greatest reported net income? A) LIFO. B) FIFO. C) Average cost.

LIFO.

For which of the following investments in securities is a firm most likely to report unrealized gains or losses on its income statement? A) Preferred stock, which the firm classifies as available-for-sale. B) Five-year bonds, which the firm purchased in a private placement. C) Listed call options, which the firm intends to exercise at expiration.

Listed call options, which the firm intends to exercise at expiration.

Which of the following indicators of a firm's liquidity position is least desirable? A) Low days of payables. B) High inventory turnover. C) Low quick ratio.

Low quick ratio.

The proposition that capital structure is irrelevant to a firm's value rests on which of the following assumptions? A) Transaction costs exist but taxes do not. B) The cost of debt capital includes a risk premium. C) Managers act in the best interests of shareholders.

Managers act in the best interests of shareholders.

Green Investments utilizes the CFA Institute Standards of Professional Conduct as their standards for ethical practice. For purposes of compliance, which of the following is least likely a violation of Green Investments' policies? A) One of Green Investments' marketing brochures states that several of the firm's portfolio managers passed all three levels of the CFA exam on their first attempts. B) At a meeting with potential clients, Green's chief investment officer states that he is among a group of the most qualified investment professionals because he holds the CFA charter. C) In interviewing a prospective employee, a portfolio manager at the firm says that the position could be financially rewarding because CFA charterholders are known to achieve superior performance results.

One of Green Investments' marketing brochures states that several of the firm's portfolio managers passed all three levels of the CFA exam on their first attempts.

While reviewing a company, an analyst identifies a permanent difference between taxable income and pretax income. Which of the following statements most accurately identifies the appropriate analyst adjustment to the financial statements? A) No financial statement adjustment is necessary. B) The amount of the tax implications of the difference should be added to deferred tax liabilities. C) The present value of the amount of the tax implications of the difference should be added to deferred tax liabilities.

No financial statement adjustment is necessary.

Lisa Crocker, CFA, manages several pension accounts and directs most of her trades to Zeta Brokers, which provides excellent trade execution as well as equities research. Regional Brokers, which also has excellent trading services, has offered to execute trades for Crocker at half the commission rate she pays Zeta, but Regional does not supply equities research. If Crocker declines to switch her business from Zeta to Regional, has she violated any CFA Institute Standards of Professional Conduct? A) Yes, because she has not obtained explicit permission from her clients to use Zeta. B) No, if the higher commissions are justified by the value of the research services she receives. C) Yes, because the Standard concerning loyalty, prudence, and care states that she must minimize trading costs for her accounts.

No, if the higher commissions are justified by the value of the research services she receives.

Scott Houser, CFA, is a widely known equity analyst whose recommendations often influence share prices. Houser changes his recommendation to "Sell" on Drywall Company and distributes this recommendation only to his clients, many of whom act on the recommendation before it becomes known to the public. Has Houser violated the Code and Standards? A) No. B) Yes, he has violated the Standard concerning communications with clients. C) Yes, he has violated the Standard concerning material nonpublic information.

No.

Paul White, CFA, works as an analyst at an investment banking firm that also manages equity-only accounts for clients. White has agreed independently to manage a portfolio of fixed-income securities for an endowment fund for a small fee but has not informed his employer. Additionally, White's supervisor has asked him to work this weekend on a proposal for a large IPO that must be delivered on Monday morning, but White declines as he would prefer to spend the weekend with his family. Which of White's actions violate the Standard concerning loyalty? A) Both of these actions. B) Neither of these actions. C) Only one of these actions.

Only one of these actions.

Which of the following actions best aligns with a penetration pricing strategy? A) Add several high-margin options to an existing product. B) Provide a product at low margins to help build market share. C) Provide free online content but generate revenues through advertisements.

Provide a product at low margins to help build market share.

Which of the following statements regarding an audit and a standard auditor's opinion is most accurate? A) The objective of an audit is to enable the auditor to provide an opinion on the numerical accuracy of the financial statements. B) To provide an independent review of a company's financial statements, an external auditor is appointed by the company's management. C) The absence of an explanatory paragraph in the audit report relating to the going concern assumption suggests that there are no serious problems that require a close examination of that assumption by the analyst.

The absence of an explanatory paragraph in the audit report relating to the going concern assumption suggests that there are no serious problems that require a close examination of that assumption by the analyst.

Which of the following statements about the central limit theorem is least accurate? A) The central limit theorem has limited usefulness for skewed distributions. B) The mean of the population and the mean of all possible sample means are equal. C) When the sample size is large, the sampling distribution of the sample means is approximately normal.

The central limit theorem has limited usefulness for skewed distributions.

For an operating lease, the value of the right-to-use asset and the lease liability on the lessee's balance sheet will be equal in each reporting period over the term of the lease under: A) IFRS, but not U.S. GAAP. B) U.S. GAAP, but not IFRS. C) both IFRS and U.S. GAAP.

U.S. GAAP, but not IFRS.

The standard deviation of returns for Stock A is 19.8%. The standard deviation of returns for Stock B is 15.4%. The covariance of returns is 0.0016. Which of the following statements best describes the correlation of the returns for the two stocks? A) Weak linear relationship. B) Negative linear relationship. C) Strong positive linear relationship.

Weak linear relationship.

Kim Vance, CFA, tells a prospective client, "Over the three years I have been in the business, my equity-oriented accounts have had a mean return of more than 20% a year." The statement is accurate, but the mean return was influenced by the account of one client realizing a large gain on a position in a small-cap company he took based on his own research. Without this account, the average gain would have been 18% per year. Has Vance violated CFA Institute Standards of Professional Conduct? A) Yes, because the statement misrepresents Vance's performance. B) Yes, because returns for an equities composite must be asset- weighted. C) No, because it is accurate and Vance has not guaranteed such returns in the future.

Yes, because the statement misrepresents Vance's performance.

Campbell Hill, CFA, has recently accepted the position of Chief Compliance Officer at an investment management firm. Hill distributes a memo stating that effective immediately (1) material supporting all company research reports will be kept in the company database in electronic form for 10 years, and hard copies of the same material will be maintained for one year only, and (2) hard copy records of all trade confirmations sent to clients must be kept on file for five years, the period mandated by local regulations. With respect to record retention: A) neither of Hill's policies violates the Standards. B) Hill's policies regarding both research reports and trade confirmations violate the Standards. C) Hill's policy regarding research reports does not violate the Standards, but the policy regarding trade confirmations does.

neither of Hill's policies violates the Standards.

Two growing firms are identical except that Alfred Company capitalizes costs for some long-lived assets that Canute Company expenses. Alfred is most likely to show higher: A) net income than Canute. B) working capital than Canute. C) investing cash flow than Canute.

net income than Canute.

An analyst has data on institutional salespeople at an investment banking firm showing how they ranked in total monthly commissions, from first to eighth. To determine whether a high rank in one month indicates a high probability of achieving a high rank in subsequent months, the analyst should use a: A) t-test. B) nonparametric test. C) mean differences test.

nonparametric test.

For a project with an initial cost of 1,000 and cash flows of 5,000 for the first year and -6,000 for the second year, a researcher calculates two IRRs: 100% and 200%. If a company's cost of capital is 18%, the company should: A) not accept the project. B) accept the project because its cost of capital is less than 100%. C) accept the project because its cost of capital is less than 200%.

not accept the project.

Alberto Cosini is the top-rated, sell-side analyst in the biotechnology industry. His recommendations significantly affect prices of industry stocks regularly. Yesterday Cosini changed his rating on Biopharm from "hold" to "buy," and Cosini's firm emailed the change to its clients although no public disclosure has yet been made. If Peter Allen, CFA, who heard about Cosini's rating change for Biopharm from his brother, purchases Biopharm in his personal account, Allen will most likely: A) not violate the Standards. B) violate the Standard concerning diligence and reasonable basis. C) violate the Standard concerning material nonpublic information.

not violate the Standards.

Joseph Drake, CFA, an investment advisor at Best Wealth Managers, has identified a growth stock that he believes has the potential to provide excellent returns over the next five years. He includes this stock on a "recommended list" that he sends to all of his clients. Drake includes recent earnings, his estimates of future earnings, and a note that more information is available on request. Drake has: A) not violated the Standards. B) violated the Standard on suitability. C) violated the Standard on client communications.

not violated the Standards.

A low inventory turnover ratio in a period of declining revenue growth is most likely an indication that a firm may have: A) obsolete inventory. B) too little inventory. C) efficient inventory management.

obsolete inventory.

Brian Farley, CFA, is an investment manager with one client, a $75 million university endowment fund. A representative of the endowment fund calls Farley and places a "sell" order on a portfolio holding whose management has just reduced its earnings guidance for the coming year. Farley also owns the security and, because the new guidance is public information, places simultaneous "sell" orders for both the client account and his personal account. According to the Standards on fair dealing and priority of transactions, Farley is in violation of: A) both of these Standards. B) neither of these Standards. C) only one of these Standards.

only one of these Standards.

Which of the following contracts involving an underlying bond is a contingent claim? An agreement to: A) exchange the bond for a fixed cash payment 90 days from now. B) sell the bond today for a fixed cash payment and buy it back one week from now for a slightly larger cash payment. C) pay the difference between the bond's market value and its face value if the issuer defaults, in exchange for a series of fixed cash payments.

pay the difference between the bond's market value and its face value if the issuer defaults, in exchange for a series of fixed cash payments.

Normal Corp. has a current ratio above 1 and a quick ratio less than 1. Which of the following actions will increase the current ratio and decrease the quick ratio? Normal Corp.: A) buys fixed assets on credit. B) uses cash to purchase inventory. C) pays off accounts payable from cash.

pays off accounts payable from cash.

Howard Klein, CFA, supervises a group of research analysts, none of whom is a CFA charterholder or CFA candidate. He has attempted on several occasions to get his firm to adopt a compliance system to ensure that applicable laws and regulations are followed. The firm's principals, however, have never adopted his recommendations. According to CFA Institute Standards of Professional Conduct, Klein at this point: A) should decline in writing to accept supervisory responsibility until his firm adopts reasonable compliance procedures. B) needs to take no action because the employees are not CFA charterholders or CFA candidates. C) must resign from the company and document in writing his reasons for doing so.

should decline in writing to accept supervisory responsibility until his firm adopts reasonable compliance procedures.

A hypothesis test of whether an independent variable explains a significant amount of the variation in the dependent variable is most appropriately constructed using a hypothesized value of a regression line's: A) intercept. B) error term. C) slope coefficient.

slope coefficient.

An owner of a business is most likely to be personally liable for its obligations is the owner is a: A) shareholder. B) sole proprietor. C) limited partner.

sole proprietor.

Russell Finley, CFA, is a managing director at Wilson Brothers and is responsible for the supervision of all trading and sales operations. Finley receives information indicating that a sales assistant made personal trades on a restricted security. According to the Standard regarding responsibilities of supervisors, the least appropriate action for Finley to take is to: A) begin an investigation to determine the extent of the wrongdoing. B) restrict and increase the monitoring of the employee's activities at the firm. C) speak directly to the employee and attain assurance that the violation will not be repeated.

speak directly to the employee and attain assurance that the violation will not be repeated.

Courtney Johnson, CFA, manages equity accounts and recommends Reliable Management to clients who ask about fixed-income investments. Reliable, in turn, provides Johnson with equity research. Johnson has not informed her equity clients, who are always very happy with Reliable's performance, of the arrangement with Reliable. Johnson has violated: A) none of the Standards. B) the Standard concerning client referrals. C) the Standard concerning soft dollar arrangements.

the Standard concerning client referrals.

ew limited partners in a hedge fund are made aware of a notice period of 60 days. This 60-day period represents the length of time within which: A) the fund must meet redemption requests. B) investors are exempt from redemption fees. C) limited partners cannot make redemption requests.

the fund must meet redemption requests.

Bear Company produces gravel-hauling equipment. The company recently began producing the Mauler, a new line of equipment. Prior to beginning production of the Mauler, the company spent $10 million in research and development costs. Bear expects the Mauler line to generate positive cash flows beginning in the fourth year. However, Bear is forecasting a one-time expense in year 5 to comply with new government emission standards. The company will use an empty building it already owns to produce the Mauler. When analyzing the project cash flows for the Mauler, Bear should least appropriately include: A) the use of the empty building. B) the research and development cost. C) the compliance cost for emissions standards.

the research and development cost.

A security's beta is best estimated by the slope of: A) the capital market line. B) the security market line. C) the security's characteristic line.

the security's characteristic line.

The median of a distribution is least likely equal to: A) the second quartile. B) the third quintile. C) the fifth decile.

the third quintile.

One year ago, the currency of Xyland (XYZ) was at a three-month forward premium to the currency of Piqua (PQR). Today, the XYZ is at a three-month forward discount to the PQR. Assuming the no-arbitrage relationship holds, this change implies that: A) the XYZ has depreciated relative to the PQR. B) today the XYZ three-month interest rate is higher than the PQR three-month interest rate. C) one year ago the XYZ three-month interest rate was higher than the PQR three-month interest rate.

today the XYZ three-month interest rate is higher than the PQR three-month interest rate.

If an analyst forecasts that a company's sales will grow 30% faster than nominal GDP growth, this is an example of: A) top-down analysis. B) bottom-up analysis. C) combining top-down and bottom-up analysis.

top-down analysis.

A country's monetary authority is most likely to manage exchange rates within crawling bands if its goal is to: A) bring about long-term depreciation of its currency. B) decrease the width of its exchange rate target zone. C) transition to independently floating exchange rates.

transition to independently floating exchange rates.

In the context of geopolitical risk, thematic risks are most accurately described as having low: A) impact. B) velocity. C) likelihood.

velocity.

Gabe Klement, CFA, an analyst for HB Investments, is responsible for the valuation model for an IPO. Without his knowledge, others at HB adjusted the inputs to the model to increase the estimated value of the shares, and the offering is oversubscribed. Complying with local securities laws, Klement purchases shares of the IPO for his personal account and allocates the remaining shares to client accounts on a pro rata basis. With regard to the Standard on knowledge of the law, the analyst: A) did not violate the Standard. B) violated the Standard by purchasing the shares of the IPO but not by allowing the IPO valuation to be published. C) violated the Standard by allowing the IPO valuation to be published and by purchasing the shares of the IPO.

violated the Standard by purchasing the shares of the IPO but not by allowing the IPO valuation to be published.

Ronald Rice, CFA, is the investment manager for a trust established for Selma Ross's mother. Ross selected Rice after interviewing several potential managers. From time to time, Ross calls Rice and asks him to purchase or sell shares in specific firms. Rice routinely complies with these requests without determining suitability for the trust. By doing so, Rice has most likely: A) violated the Standard concerning loyalty, prudence, and care. B) violated the Standard concerning independence and objectivity. C) not violated the Code and Standards because he has followed the client's request.

violated the Standard concerning loyalty, prudence, and care.

Charlotte Stein, a CFA candidate, received a copy of a stock selection model designed by a Wall Street analyst friend, who told her she was free to use it. After reviewing the program and making some adjustments, Stein shows the new model to her supervisor. Her supervisor says she did a great job and tells Stein to incorporate the new model in her next industry review. Stein has: A) violated the Standard concerning misrepresentation. B) violated the Standard concerning conflicts of interest. C) not violated CFA Institute Standards of Professional Conduct.

violated the Standard concerning misrepresentation.

Rowlin Corporation, which reports under IFRS, wrote down its inventory of electronic parts last period from its original cost of €28,000 to net realizable value of €25,000. This period, inventory at net realizable value has increased to €30,000. Rowlin should revalue this inventory to: A) €28,000, and report a gain of €3,000 on the income statement. B) €30,000, and report a gain of €3,000 on the income statement. C) €30,000, and report a gain of €5,000 on the income statement.

€28,000, and report a gain of €3,000 on the income statement.