Missed Econ/Quant/Ethics CFA Q's

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Direct or indirect? 1.) _________________ are taxes on spending on a variety of goods and services in an economy—such as the excise duties on fuel, alcohol, and tobacco as well as sales (or value-added tax)—and often exclude health and education products on social grounds. In addition, taxes on gambling may also be considered to have a social aspect in deterring such activity 2.) ________________ are levied on income, wealth, and corporate profits and include capital gains taxes, national insurance (or labour) taxes, and corporate taxes. They may also include a local income or property tax for both individuals and businesses.

1.)Indirect 2.) Direct

Returns --> <0%---0%<5%---5%<10%---10%+ Relative frequency (12%,37%,44%,7%) what is the cumulative frequency of 5-10%?

12% + 37% + 44% = 93%

Upsilon Natural Gas, Inc. is a monopoly enjoying very high barriers to entry. Its marginal cost is $40 and its average cost is $70. A recent market study has determined the price elasticity of demand is 1.5. The company will most likely set its price at: $40. $70. $120.

120 MR = P(1-(1/Ep)) 40 = P(1-(1/1.5)) P = 120

Earnings that result from non-recurring activities most likely indicate: A.) lower-quality earnings. B.) biased accounting choices. C.) lower-quality financial reporting.

Ethics --> Which of the following is not part of the nine major sections of the GIPS standards? A.) Performance Fees B.) Disclosure C.) Input Data

For a given economy and a given period of time, GDP measures the: I.) aggregate income earned by all households, all companies, and the government. II.) total income earned by all of the country's citizens, firms, and the government. III.) total market value produced of resalable and final goods and services. The most appropriate description of what is measured by GDP is given by: A.) I only. B.) I and II. C.) I and III.

Information about management and director compensation would *least likely* be found in the: A.) auditor's report. B.) proxy statement. C.) notes to the financial statements.

Inherent risks in an investment are most appropriately evaluated in which step of the financial statement analysis framework? A.) Develop and communicate conclusions/recommendations B.) Articulate the purpose and context of analysis C.) Process data

The _____________ school believes that causes business of cycle is the shifts in AD due to changes in expectations are the primary cause of business cycles. These fluctuations are due to swings in optimism by those running companies A.) Keynesians B.) Monetarists C.) Neoclassicial D.) Austrian

Under conditions of perfect competition, a company will break even when market price is equal to the minimum point of the: A.) Average total cost curve. B.) Average variable cost curve. C.) Short-run marginal cost curve.

Which of the following is least likely an assumption underlying the capital asset pricing model (CAPM)? A.) Investors analyze securities according to their own future cash flow estimates and probability distributions. B.) There are no restrictions on short selling assets. C.) The amount invested in an asset can be as much or as little as the investor wants.

______________- is found by calculating absolutely frequency / # of observations A.) Relative frequency B.) Absolute Frequency C.) Cumulative frequency

Oni Erobo, CFA, the General Partner in a real estate development project, is responsible for completing the project within an 18-month period and within budget. Erobo will receive an equity stake of 20% in the project if it comes within budget. Concerned that project costs could escalate, the Limited Partners require Erobo to cap expenses at 15% above budget. Costs were within expectation up until the last month of construction when imported lighting fixture costs (accounting for roughly 5% of total costs) escalated by more than 50%. As a result, the overall return declined below the partners expected 35% ROI. Erobo did not inform the Limited Partners about the increased costs. Did Erobo most likely violate the CFA Code of Ethics and Standards of Professional Conduct? A.) No. B.) Yes, because returns are lower than expected by the Partners. C.) Yes, because he did not disclose the increased costs to his Partners.

A is correct because no violation took place. Erobo was not required to inform the Limited Partners about the increase in lighting fixture cost as the increase would not cause the overall project cost to escalate higher than the 15% budget variance contingency agreed within the partnership.

A random variable with a finite number of equally likely outcomes is best described by a: A.) discrete uniform distribution. B.) binomial distribution. C.) continuous uniform distribution.

A A is correct. A random variable has a discrete uniform distribution when there are a finite number of equally likely specified outcomes. B is incorrect. A binomial distribution has only two outcomes, and they need not be equally likely. C is incorrect. A finite number of outcomes is consistent with a discrete distribution, not a continuous distribution.

Among developed economies, which of the following sources of economic growth is most likely to explain superior growth performance? A.) Technology. B.) Capital stock. C.) Labor supply.

A A is correct. Technology is the most important factor affecting economic growth for developed countries. Technological advances are very important because they allow an economy to overcome the limits imposed by diminishing marginal returns.

In descriptive statistics, an example of a parameter is the: A.) median of a population. B.) mean of a sample of observations. C.) standard deviation of a sample of observations.

A Any descriptive measure of a population characteristic is referred to as a parameter

Proceeds from the issuance of a bond is classified as a A.) Financing activity B.) Operating activity C.) Investing activity Proceeds from the sale of trading securities A.) Financing activity B.) Operating activity C.) Investing activity

A B

A hypothesis test fails to reject a false null hypothesis. This result is best described as a: A.) Type II error. B.) Type I error. C.) test with little power.

A Failure to reject a false null hypothesis is a Type II error.

In the case of a normal good with a decrease in own price, which of the following statements is most likely true? A.) Both the substitution and income effects lead to an increase in the quantity purchased. B.) The substitution effect leads to an increase in the quantity purchased, while the income effect has no impact. C.) The substitution effect leads to an increase in the quantity purchased, while the income effect leads to a decrease.

A In the case of normal goods, the income and substitution effects are reinforcing, leading to an increase in the amount purchased after a drop in price.

An economic peak is most closely associated with: A.) accelerating inflation. B.) stable unemployment. C.) declining capital spending.

A Inflation is rising at peaks.

Technical analysts most likely study trends and patterns in security prices to forecast a company's: A.) future price trends. B.) earnings potential. C.) intrinsic value.

A Technical analysts believe that market trends and patterns tend to repeat, so they rely on recognizing past patterns in an attempt to project future security price patterns. B is incorrect. Forecasting a company's earnings potential would fall under fundamental analysis, not technical analysis. C is incorrect. Forecasting a company's intrinsic value would fall under fundamental analysis, not technical analysis.

Which of the following is most likely to be an explanation of the power of a test? The power of a test is the probability of: A.) rejecting the null when it is false. B.) not accepting the alternative when it is false. C.) a Type I error.

A The power of a test is the probability of correctly rejecting the null—that is, the probability of rejecting the null when it is false.

A profit maximum is *least likely* to occur when: A.) average total cost is minimized. B.) marginal revenue equals marginal cost. C.) the difference between total revenue and total cost is maximized.

A The quantity at which average total cost is minimized does not necessarily correspond to a profit maximum.

A wireless phone manufacturer introduced a next-generation phone that received a high level of positive publicity. Despite running several high-speed production assembly lines, the manufacturer is still falling short in meeting demand for the phone nine months after introduction. Which of the following statements is the mostplausible explanation for the demand/supply imbalance? A.) The phone price is low relative to the equilibrium price. B.) Competitors introduced next-generation phones at a similar price. C.) Consumer incomes grew faster than the manufacturer anticipated.

A The situation described is one of excess demand because, in order for markets to clear at the given level of quantity supplied, the company would need to raise prices.

If a strengthening economy leads discouraged workers to return to an active employment search, the number of unemployed people would, at least initially, most likely: A.) increase. B.) decrease. C.) remain unchanged.

A The unemployed are defined as those who are actively seeking employment but are currently without a job. Discouraged workers are without a job but have given up searching for work and so are not classified as being unemployed. A strengthening economy will lead discouraged workers to once again actively search for work; they will be reclassified as unemployed, and at least initially, the number of unemployed people will increase and the unemployment rate will rise.

Cash outflows include cash payments to repurchase stock (e.g., treasury stock) and to repay bonds and other borrowings. A.) Financing activity B.) Operating activity C.) Investing activity

A This is a cash outflow

According to the Code and Standards regarding knowledge of laws and regulations, CFA Institute members and candidates must: A.) understand the relevant regulations for all the countries where they trade securities. B.) have detailed knowledge of all the laws that could potentially govern the member's activities. C.) spend a minimum of five hours per calendar year on continuing education activities related to applicable laws and regulations.

A requires members and candidates to understand applicable laws and regulations in those countries where they trade or conduct business. While an understanding of laws and regulations is required, members and candidates can rely on legal counsel and compliance to be subject matter experts in these areas. The Standards do not require a minimum of five hours of continuing education.

If a firm restructures and wants to remain compliant with the GIPS standards, it should most likely: A.) maintain the historical performances for all composites. B.) alter the historical performances within existing composites. C.) create all new composites with proper disclosures regarding the reorganization.

A Changes in a firm's organization must not lead to alteration of historical composite performance.

Published ratings on stocks ranging from 1 (strong sell) to 5 (strong buy) are examples of which measurement scale? A.) Ordinal B.) Interval C.) Nominal

A Ordinal scales sort data into categories that are ordered with respect to some characteristic and may involve numbers to identify categories but do not assure that the differences between scale values are equal. The buy rating scale indicates that a stock ranked 5 is expected to perform better than a stock ranked 4, but it tells us nothing about the performance difference between stocks ranked 4 and 5 compared with the performance difference between stocks ranked 1 and 2, and so on.

Which of the following statements related to requirements for the CFA Institute Standards of Professional Conduct Standard V(B)-Communication with Clients and Prospective Clients is least likely accurate? A.) The standard requires members and candidates to: divulge the number of investment related personnel responsible for external communication. B.) disclose the basic format and general principles of the investment process. C.) distinguish between fact and opinion in the presentation of investment analysis and recommendations.

A The CFA Institute Standards of Professional Conduct Standard V(B)-Communication with Clients and Prospective Clients does not limit the type or number of staff responsible for external communication.

Sue Kim, CFA, a US citizen, works as an analyst for a subsidiary of a US investment firm on a small island that attracts offshore investment accounts. Local securities laws allow insider trading. While having dinner with the CEO of a local company, Kim learns that the firm is in negotiations to be acquired for a significant premium. Would Kim most likely comply with the CFA Institute Standards if she purchased the company's shares for her client accounts? A.) No. B.) Yes, local laws allow insider trading. C.) Yes, if she receives permission from compliance department

A because Standard II(A) prohibits members or candidates from acting on material nonpublic information no matter if local laws or a compliance department allow it. In the event of conflict between the Code and Standards and local laws, Standard I(A) requires members or candidates to comply with the stricter law, rule, or regulation.

Which of the following distinct entities can least likely claim compliance with the Global Investment Performance Standards (GIPS)? A.) A multi-national financial services holding company B.) An investment management division of a regional commercial bank C.) A locally incorporated subsidiary undertaking investment management services

A is correct because the Global Investment Performance Standards require that firms be defined as an investment firm, subsidiary, or division held out to clients or prospective clients as a distinct business entity (0.A.12). A multi-national financial services holding company is unlikely to be solely operating as an investment firm, and the scope of the business could also make it more difficult to claim compliance on a firm-wide basis.

cash receipts from issuing stock (common or preferred) or bonds and cash receipts from borrowing is classified as a A.) Financing activity B.) Operating activity C.) Investing activity

A This is a cash inflow

How does ethical conduct most likely compare with what is legally required? A.) Ethical conduct goes beyond what is legally required. B.) There are no differences between the two; they are the same. C.) Doing what is legally required removes the need for ethical conduct.

A is correct

The stated annual interest rate is 12.75%. If the frequency of compounding is monthly, the effective annual rate (EAR) is closest to: A.) 13.52%. B.) 12.75%. C.) 12.06%.

A is correct

Which of the following statements is most likely correct regarding the spot and forward curves. The spot curve: A.) can be calculated from the forward curve, and the forward curve can be calculated from the spot curve. B.) can be calculated from the forward curve, but the forward curve cannot be calculated from the spot curve. C.) cannot be calculated from the forward curve, but the forward curve can be calculated from the spot curve.

A is correct

Which technique most likely increases the cash flow provided by operations? A.) Stretching the accounts payable credit period B.) Applying all non-cash discount amortization against interest capitalized C.) Shifting classification of interest paid from financing to operating cash flows

A is correct

Which policy alternative is most likely to be effective for growing both the public and private sectors? A.) Easy fiscal/easy monetary policy. B.) Easy fiscal/tight monetary policy. C.) Tight fiscal/tight monetary policy.

A is correct If both fiscal and monetary policies are "easy," then the joint impact will be highly expansionary, leading to a rise in aggregate demand, low interest rates, and growing private and public sectors.

How much will the value of a three-year $100 par value coupon bond with annual payments, a coupon rate of 9%, and a discount rate of 7% most likely change if market interest rates immediately increase by 1%? A.) −2.68 B.) −3.47 C.) −2.40

A is correct 9/(1.07^1) + 9/(1.07^2)+1/(109/1.07^3) =8.41+7.86+88.98 =105.25 if market interest rates increase, the discount rate will increase, and the value will be 9/(1.08^1)+ 9/ (1.08^2) + 109/(1.083) =8.33+7.72+86.53 =102.57

A large industrialized country has recently devalued its currency in an attempt to correct a persistent trade deficit. Which of the following domestic industries is most likely to benefit from the devaluation? A.) Luxury cars. B.) Branded prescription drugs. C.) Restaurants and live entertainment venues.

A is correct A devaluation of the domestic currency means domestic producers are cutting the price faced by their foreign customers. The impact on their unit sales and their revenue depends on the elasticity of demand. Expensive luxury goods exhibit high price elasticity. Hence, luxury car producers are likely to experience a sharp increase in sales and revenue due to the devaluation.

An analyst writes in an economic report that the current phase of the business cycle is characterized by accelerating inflationary pressures and borrowing by companies. The analyst is most likely referring to the: A.) peak of the business cycle. B.) contraction phase of the business cycle. C.) early expansion phase of the business cycle.

A is correct Accelerating inflation and rapidly expanding capital expenditures typically characterize the peak of the business cycle. During such times, many businesses finance their capital expenditures with debt to expand their production capacity.

An increase in which of the following items will most likely result in a wider confidence interval for the population mean? A.) Reliability factor B.) Sample size C.) Degrees of freedom

A is correct An increase in the reliability factor (the degree of confidence) increases the width of the confidence interval. Increasing the sample size and increasing the degrees of freedom both shrink the confidence interval.

Aquarius, Inc. is the dominant company and the price leader in its market. One of the other companies in the market attempts to gain market share by undercutting the price set by Aquarius. The market share of Aquarius will most likely: A.) increase. B.) decrease. C.) stay the same.

A is correct As prices decrease, smaller companies will leave the market rather than sell below cost. The market share of Aquarius, the price leader, will increase.

Which of the following would be included in Canadian GDP for a given year? The market value of: A.) wine grown in Canada by US citizens. B.) electronics made in Japan and sold in Canada. C.) movies produced outside Canada by Canadian film makers.

A is correct Canadian GDP is the total market value of all final goods and services produced in a given time period within Canada. The wine was produced in Canada and counts towards Canadian GDP.

Under conditions of perfect competition, in the long run firms will most likely earn: A.) normal profits. B.) positive economic profits. C.) negative economic profits.

A is correct Competition should drive prices down to long-run marginal cost, resulting in only normal profits being earned.

A market structure with relatively few sellers of a homogeneous or standardized product is best described as: A.) oligopoly. B.) monopoly. C.) perfect competition. D.) monopolistic competition

A is correct Few sellers of a homogeneous or standardized product characterizes an oligopoly

In the case of a normal good with a decrease in own price, which of the following statements is most likelytrue? A.) Both the substitution and income effects lead to an increase in the quantity purchased. B.) The substitution effect leads to an increase in the quantity purchased, while the income effect has no impact. C.) The substitution effect leads to an increase in the quantity purchased, while the income effect leads to a decrease.

A is correct In the case of normal goods, the income and substitution effects are reinforcing, leading to an increase in the amount purchased after a drop in price.

Assume that the nominal spot exchange rate (USD/EUR) increases by 7.5%, the eurozone price level decreases by 4%, and the US price level increases by 2.5%. The change in the real exchange rate (%) is closest to: A.) 0.7%. B.) −6.3%. C.) 14.8%.

A is correct Real exchange rate = Nominal spot exchange rate × (CPI of the foreign country/CPI of the domestic country) Change in real exchange rate = (1 + change in exchange rate) * (1 + change in price level or foreign country) / (1+ Change in price level of domestic country) = (1+7.5%) * (1-4%) / (1+2.5%) -1

The following financial data are available for a company: Return on assets (ROA) -- 4.8% Total asset turnover -- 1.92 Financial leverage -- 1.75 Dividend payout ratio -- 48.1% The company's sustainable growth rate is closest to: A.) 4.40%. B.) 4.78%. C.) 4.00%.

A is correct Sustainable growth rate = Retention ratio (B) * ROE B = 1- dividend payout ratio 0.519 = 1- 0.481 ROE = ROA * Financial leverage .084 = 0.048* 1.75

Which curve represents combinations of income and the real interest rate at which planned expenditure equals income? A.) The IS curve. B.) The LM curve. C.) The aggregate demand curve.

A is correct The IS curve represents combinations of income and the real interest rate at which planned expenditure equals income.

Equality between aggregate expenditure and aggregate output implies that the government's fiscal deficit must equal: A.) Private saving - Investment - Net exports. B.) Private saving - Investment + Net exports. C.) Investment - Private saving + Net exports.

A is correct The fundamental relationship among saving, investment, the fiscal balance, and the trade balance is S= I + (G - T) + (X - M). This form of the relationship shows that private saving must fund investment expenditures, the government fiscal balance, and net exports (= net capital outflows). Rearranging gives G - T = (S - I) - (X - M). The government's fiscal deficit (G - T) must be equal to the private sector's saving/investment balance (S - I) minus net exports.

Oligopolistic pricing strategy most likely results in a demand curve that is: A.) kinked. B.) vertical. C.) horizontal.

A is correct The oligopolist faces two different demand structures, one for price increases and another for price decreases. Competitors will lower prices to match a price reduction, but will not match a price increase. The result is a kinked demand curve.

The null hypothesis is most appropriately rejected when the p-value is: close to zero. negative. close to one.

A is correct The p-value is the smallest level of significance at which the null hypothesis can be rejected. The smaller the p-value, the stronger the evidence against the null hypothesis. P-values close to zero strongly suggest that the null hypothesis should be rejected.

Bailey Watson, CFA, manages 25 emerging market pension funds. He recently had the opportunity to buy 100,000 shares in a publicly listed company whose prospects are considered "above industry norm" by most analysts. The company's shares rarely trade because most managers take a "buy and hold" strategy due to the company's small free float. Before placing the order with his dealer, Watson allocated the shares to be purchased according to the weighted value of each of his clients' portfolios. When it came time to execute the trades, the dealer was only able to purchase 50,000 shares. To prevent violating Standard III(B)-Fair Dealing, it would be mostappropriate for Watson to reallocate the 50,000 shares purchased by: A.) reducing each pension fund's allocation proportionately. B.) distributing them equally amongst all the pension fund portfolios. C.) allocating randomly but giving funds left out priority on the next similar type trade.

A is correct because Standard III(B)-Fair Dealing requires members and candidates to deal fairly and objectively with all clients. Certain clients cannot be favored over other clients when their investment objectives and circumstances are similar. Therefore, the most appropriate way to handle the reallocation of an illiquid share is to reduce each client's proportion on a pro rata, or weighted basis.

Sheila Schleif, CFA, is an equity analyst at an investment banking division of Mokara Financial Group, a full service financial group. Schleif uses a multi-factor computer model to make stock recommendations for all clients of Mokara. Schleif discovers that the model contains an error. If the error were corrected, her most recent buy recommendation communicated to all clients would change to a sell. Schleif corrects the error, changing the buy to a sell recommendation, and then simultaneously distributes via e-mail the revision to all investment banking clients who received the initial recommendation. A week later, Schleif sells the same shares she held in her personal portfolio. Concerning her actions, Schleif most likely violated which of the following CFA Institute Standards of Professional Conduct? A.) Fair Dealing B.) Priority of Transactions C.) Diligence and Reasonable Basis

A is correct because the analyst violated Standard III(B)-Fair Dealing by selectively distributing the recommendation only to investment banking clients despite being responsible for making investment recommendations to all group clients. Schleif should distribute the change in recommendation to all clients who received the initial recommendation, not just those within the investment banking division of the group.

Ileana Inkster, CFA, was recently offered a senior management position within the trust department at a regional bank. The department is new, but the bank has plans to expand it significantly over the next few months. Inkster has been told she will be expected to help grow the client base of the trust department. She is informed that the trust department plans to conduct educational seminars and pursue the attendees as new clients. Inkster notices that recent seminar advertisements prepared by the bank's marketing department do not mention that investment products will be for sale at the seminar. The ads indicate attendees can "learn how to immediately add $100,000 to their net worth." What should Inkster most likely do to avoid violating any CFA Institute Standards of Professional Conduct? A.) Decline to accept the new position B.) Accept the position and revise the marketing material C.) Accept the position and inform senior management of inadequate compliance procedures

A is correct because the prospective supervisor's first step should be to not take the position. Accepting the position with inadequate procedures in place or improper marketing material would leave Inkster at risk of incurring a violation of the Code and Standards—Standard IV(C)-Responsibilities of Supervisors. She could agree to be hired as an interim consultant with the bank in order to implement adequate procedures before taking on any supervisory role.

Ethics --------------------------------------------------- For a retail client's portfolio to be included in a GIPS compliant firm's composite, it will most likely be in a composite: A.) composed of discretionary funds. B.) restricted to retail funds. C.) with both fee-paying and non-fee-paying funds.

A is correct composite must include all actual, fee-paying, discretionary portfolios managed in accordance with the same investment mandate, objective, or strategy. B is incorrect because institutional funds may be included in a composite with retail funds if it has a similar investment mandate, objective, or strategy.

The marginal revenue per unit sold for a firm doing business under conditions of perfect competition will most likely be: A.) equal to average revenue. B.) less than average revenue. C.) greater than average revenue.

A is correct b/c Under perfect competition, a firm is a price taker at any quantity supplied to the market, and AR = MR = Price.

A corporate *bond issuer* in a country with L/T rising interest rates that wishes to avoid increasing interest rate changes would most likely *issue* ? A.) Fixed rate note B.) Floating rate note C.) Variable note rate

A is correct b/c To avoid having to make ever-increasing interest payments on the bond, the issuer would most likely issue a fixed-rate bond. The company wishes to avoid rising interest payments and can only do so by issuing fixed-rate debt. Floating-rate notes (FRNs) typically pay interest based on a reference rate (e.g., Libor) plus a spread fixed through maturity. This type of bond would be attractive to investors believing that interest rates will increase. An FRN would initially gain a greater price under the circumstances, but would not meet the issuer's desire to avoid increasing interest charges.

A company in a country with currency under a threat of depreciation relative to major world currencies would MOST LIKELY seek the widest audience by issuing A.) Eurobond B.) Domestic bond C.) Foreign bond denominated in euros

A is correct because Explanation:A Eurobond would receive a wider audience than the company's domestic bonds, and the company would likely prefer to issue Eurobonds, which would not be subject to as much regulation as a foreign bond. Domestic bonds are issued in the country's depreciating currency, which would likely mean a narrower audience than if issued in another non-Eurozone country's currency or in euros. A foreign bond denominated in Euros would potentially have the same audience from a currency perspective as a Eurobond but because Eurobonds are issued with detachable coupons that allow greater flexibility in receiving interest payments, they would have a broader market. In addition, the issuer would prefer the less regulatory scrutiny that accompanies a Eurobond issue.

A price index of goods and services that excludes food and energy is most likely used to calculate: A.) core inflation. B.) the GDP deflator. C.) headline inflation.

A is correct. A price index of goods and services that excludes food and energy is used to calculate core inflation. Policymakers often use core inflation when reading the trend in the economy and making economic policies. The reason is because policymakers are trying to avoid overreaction to short-term fluctuations in prices as a result of short-term changes in supply and demand.

Consider two countries, A and B. Country A, a closed country with a relative abundance of labor, holds a comparative advantage in the production of textiles. Country B has a relative abundance of capital. When the textile trade is opened between the two countries, Country A will most likely experience a favorable impact on: A.) labor. B.) both capital and labor. C.) capital.

A is correct. As a country opens up to trade, the benefit accrues to the abundant factor, which is labor in Country A.

In assigning credit ratings, the practice of notching by the rating agencies is least likely used to quantify the: A.) probability of default. B.) priority of payment in the event of default. C.) potential severity of loss in the event of default.

A is correct. For the rating agencies, the main factor motivating the assignment of a rating is the probability of default. Notching is most likely to be used to address secondary factors such as the priority of payment in the event of default and the potential severity of loss in the event of default. These secondary factors are accounted for via notching the issue's rating up or down relative to the issuer's rating.

A national government responds to a severe recession by funding numerous infrastructure projects using deficit spending. Which school of economic thought is most consistent with such action. A.) Keynesian B.) Monetarist C.) Neoclassical

A is correct. Keynesian economics is based on government intervention in the form of fiscal policy. The national government responds to the recession by using deficit spending to fund infrastructure projects.

Which of the following reports is least likely to be filed with the US SEC? A.) Annual report B.) Form 10-K C.) Proxy statement

A is correct. The annual report is not a requirement of the SEC. 10K and Proxy statement are filed with the SEC

. Compared with its market-value-weighted counterpart, a fundamental-weighted index is least likely to have a: A.) momentum effect. B.) contrarian effect. C.) value tilt.

A is correct. The momentum effect is a characteristic of a market-capitalization-weighted index, not a fundamental index.

The value of a European call option is inversely related to the: A.) exercise price. B.) time to expiration. C.) volatility of the underlying.

A is correct. The value of a European call option is inversely related to the exercise price. A lower exercise price means there are more potential outcomes at which the call expires in-the-money

If Brazil and South Africa have free trade with each other, a common trade policy against all other countries, but no free movement of factors of production between them, then Brazil and South Africa are part of a: A.) customs union. B.) common market. C.) free trade area (FTA).

A is correct. A customs union extends a free trade area (FTA) by not only allowing free movement of goods and services among members, but also creating common trade policy against non-members. Unlike a more integrated common market, a customs union does not allow free movement of factors of production among members.

Which of the following is most likely classified as a defensive industry? A.) A mature industry with government-controlled pricing B.) A non-cyclical, high-growth industry C.) A cyclical industry with a few competitors

A is correct. A defensive industry is non-cyclical with stable earnings. A mature industry with government-controlled pricing will have stable earnings and be non-cyclical.

A liquidity trap is most closely associated with: A) deflation. B) an inelastic demand for money. C) a positive nominal central bank policy rate.

A is correct. A liquidity trap arises when the demand for money is infinitely elastic because individuals elect to hold additional money balances rather than respond to stimulative rate cuts by spending. As a result, weakening consumption leads to deflation.

A two-year spot rate of 5% is most likely the: A.) yield to maturity on a zero-coupon bond maturing at the end of Year 2. B.) coupon rate in Year 2 on a coupon-paying bond maturing at the end of Year 4. C.) yield to maturity on a coupon-paying bond maturing at the end of Year 2.

A is correct. A spot rate is defined as the yield to maturity on a zero-coupon bond maturing at the date of that cash flow.

A country with a trade deficit will most likely: A.) have an offsetting capital account surplus. B.) save enough to fund its investment spending. C.) buy assets from foreigners to fund the imbalance.

A is correct. A trade deficit must be exactly matched by an offsetting capital account surplus to fund the deficit. A capital account surplus reflects borrowing from foreigners (an increase in domestic liabilities) and/or selling assets to foreigners (a decrease in domestic assets). A capital account surplus is often referred to as a "capital inflow" because the net effect is foreign investment in the domestic economy.

A sample of 438 observations is randomly selected from a population. The mean of the sample is 382, and the standard deviation is 14. Based on Chebyshev's inequality, the endpoints of the interval that must contain at least 88.89% of the observations are closest to: A.) 340 and 424. B.) 396 and 480. C.) 354 and 410.

A is correct. According to Chebyshev's inequality, the proportion of the observations within k standard deviations of the arithmetic mean is at least 1−1/k2 for all k >1. For k = 3, that proportion is 1−1/32 ,which is 88.89%. The lower endpoint is, therefore, the mean (382) minus 3 times 14 (the standard deviation), and the upper endpoint is 382 plus 3 times 14 (i.e., 340 and 424, respectively).

To comply with the GIPS standards, firms most likely must: A.) apply standards on a firm-wide basis. B.) be verified before they can claim compliance. C.) be defined as separate legal entities.

A is correct. According to requirements for GIPS compliance, GIPS standards must be applied on a firm-wide basis. They cannot be separately applied to composites.

An executive from Switzerland checked into a hotel room in Spain and was told by the hotel manager that 1 EUR will buy 1.2983 CHF. From the executive's perspective, an indirect exchange rate quote would be: A.) 0.7702 EUR per CHF. B.) 0.7702 CHF per EUR. C.) 1.2983 EUR per CHF.

A is correct. An indirect quote takes the foreign country as the price currency and the domestic country as the base currency. To get CHF—which is the executive's domestic currency—as the base currency, the quote must be stated as EUR/CHF. Using the hotel manager's information, the indirect exchange rate is (1/1.2983) = 0.7702.

The statement that is most consistent with real business cycle (RBC) models is that: A.) persons are unemployed because their asking wages are too high. B.) governments should intervene when the economy is in contraction. C.) monetary variables have a major impact on GDP growth.

A is correct. As suggested particularly by the earliest RBC models, a person is unemployed because he or she is asking for wages that are too high.

According to the Austrian school, the most appropriate government response to an economic recession is to: A.) allow the market to adjust naturally. B.) maintain steady growth in the money supply. C.) decrease the market rate of interest below its natural value.

A is correct. Austrian economists advocate limited government intervention in the economy. They advise that the best thing to do in a recession is to allow the necessary market adjustment to take place.

A decrease in average weekly initial claims for unemployment is most likely indicative of: A.) an economic recovery beginning. B.) the business cycle reaching its peak. C.) an economic downturn beginning.

A is correct. Average weekly initial claims for unemployment insurance is a leading indicator of economic activity, and a decrease in it is an indication of rehiring at the start of a recovery.

Which of these definitions of duration is most relevant to a bond investor? A bond's duration is its: A.) price sensitivity to yield changes. B.) first derivative of value with respect to its yield. C.) half-life.

A is correct. Bond investors are concerned about interest rate risk, and duration is a good measure of interest rate risk.

A large country can: A.) benefit by imposing a tariff. B.) benefit with an export subsidy. C.) not benefit from any trade restriction.

A is correct. By definition, a large country is big enough to affect the world price of its imports and exports. A large country can benefit by imposing a tariff if its terms of trade improve by enough to outweigh the welfare loss arising from inefficient allocation of resources.

Which is the most accurate statement regarding central banks and monetary policy? A.) Central bank activities are typically intended to maintain price stability. B.) Monetary policies work through the economy via four independent channels. C.) Commercial and interbank interest rates move inversely to official interest rates.

A is correct. Central bank activities are typically intended to maintain price stability. Concerning choice B, note that the transmission channels of monetary policy are not independent.

Which of the following is most likely to be considered a potential benefit of accounting conservatism? A.) A reduction in litigation costs B.) Less biased financial reporting C.) An increase in current period reported performance

A is correct. Conservatism reduces the possibility of litigation and, by extension, litigation costs. Rarely, if ever, is a company sued because it understated good news or overstated bad news.

The inflation rate most likely relied on to determine public economic policy is: A.) core inflation. B.) headline inflation. C.) index of food and energy prices.

A is correct. Core inflation is less volatile since it excludes food and energy prices and therefore will not be as likely to lead to policy overreactions when serving as a target.

Holding all else constant, a company that develops intangible assets internally rather than purchasing them is most likely to report: A.) lower amounts of assets. B.) higher investing cash outflows. C.) lower operating cash outflows.

A is correct. Costs associated with internally developing intangible assets are usually expensed; thus, a company that has internally developed intangible assets through expenditures on R&D will recognize a lower amount of assets than a company that has obtained intangible assets through external purchase.

Which of the following statements best describes the benefits of international trade? A.) Countries gain from exchange and specialization. B.) Countries receive lower prices for their exports and pay higher prices for imports. C.) Absolute advantage is required for a country to benefit from trade in the long term.

A is correct. Countries gain from exchange when trade enables each country to receive a higher price for exported goods and/or pay a lower price for imported goods. This leads to more efficient resource allocation and allows consumption of a larger variety of goods.

Suppose that inflation increases due to higher capacity utilization. Such inflation is best described as: A) demand-pull inflation. B.) stagflation. C.) cost-push inflation.

A is correct. Demand-pull inflation depends upon the relationship between actual and potential GDP and industrial capacity utilization.

Financial reports of the lowest level of quality reflect: A.) fictitious events. B.) biased accounting choices. C.) accounting that is non-compliant with GAAP.

A is correct. Financial reports span a quality continuum from high to low based on decision-usefulness and earnings quality

A three-month forward exchange rate in CAD/USD is listed by a dealer at 1.0123. The dealer also quotes 3-month forward points as a percentage at 6.8%. The CAD/USD spot rate is closest to: 0.9478. 1.0550. 1.0862.

A is correct. Given the forward rate and forward points as a percentage, the unknown in the calculation is the spot rate. The calculation is as follows:Spot rate × (1 + Forward points as a percentage) = Forward rateSpot rate × (1 + 0.068) = 1.0123Spot = 1.0123/1.068 =0.9478

Germany has much more capital per worker than Portugal. In autarky each country produces and consumes both machine tools and wine. Production of machine tools is relatively capital intensive whereas winemaking is labor intensive. According to the Heckscher-Ohlin model, when trade opens: A.) Germany should export machine tools and Portugal should export wine. B.) Germany should export wine and Portugal should export machine tools. C.) Germany should produce only machine tools and Portugal should produce only wine.

A is correct. In the Heckscher-Ohlin model a country has a comparative advantage in goods whose production is intensive in the factor with which it is relatively abundantly endowed. In this case, capital is relatively abundant in Germany so Germany has a comparative advantage in producing the capital-intensive product: machine tools. Portugal is relatively labor abundant, hence should produce and export the labor-intensive product: wine.

A Japanese exporter will sell US dollars for Japanese yen in the quote-driven currency markets. Which of the following statements best describes her currency exchange transactions? A.) Her counterparties are dealers. B.) She will pay commissions for exchange services. C.) This currency exchange transaction takes place in organized exchanges.

A is correct. In the quote-driven currency markets, dealers are counterparties to currency exchange transactions.

The strategic asset allocation and portfolio rebalancing policy are most likely addressed in which section of an investment policy statement? A.) Appendices B.) Investment objectives C.) Procedures

A is correct. Information related to strategic asset allocation and portfolio rebalancing policy would be placed in the appendices of an investment policy statement.

The strategic asset allocation and portfolio rebalancing policy are most likely addressed in which section of an investment policy statement? A.) Appendices B.) Investment objectives C.) Procedures

A is correct. Information related to strategic asset allocation and portfolio rebalancing policy would be placed in the appendices of an investment policy statement.

When a central bank announces a decrease in its official policy rate, the desired impact is an increase in: A.) investment. B.) interbank borrowing rates. C.) the national currency's value in exchange for other currencies.

A is correct. Investment is expected to move inversely with the official policy rate.

Given an independent central bank, monetary policy actions are more likely than fiscal policy actions to be: a.) implementable quickly. b.) effective when a specific group is targeted. c.) effective when combating a deflationary economy.

A is correct. Monetary actions may face fewer delays to taking action than fiscal policy, especially when the central bank is independent.

Normal profit is best described as: A.) zero economic profit. B.) total revenue minus all explicit costs. C.) the sum of accounting profit plus economic profit.

A is correct. Normal profit is the level of accounting profit such that implicit opportunity costs are just covered; thus, it is equal to a level of accounting profit such that economic profit is zero.

If the probability for an event Z is 14% (i.e., P(Z) = 14%), the odds for Z are closest to: A.) 0.163. B.) 0.071. C.) 0.123.

A is correct. Odds are calculated as P(Z)/[1 − P(Z)]. In this problem, 0.14/0.86 = 0.16279 ~ 0.163.

Which of the following best describes an opportunity for management to issue low-quality financial reports? A.) Ineffective board of directors B.) Pressure to achieve some performance level C.) Corporate concerns about financing in the future

A is correct. Opportunities to issue low quality financial reports include internal conditions such as an ineffective board of directors and external conditions such as accounting standards that provide scope for divergent choices.

Which is the most accurate statement regarding the demand for money? A.) Precautionary money demand is directly related to GDP. B.) Transactions money demand is inversely related to returns on bonds. C.) Speculative demand is inversely related to the perceived risk of other assets.

A is correct. Precautionary money demand is directly related to GDP. Precautionary money balances are held to provide a buffer against unforeseen events that might require money. Precautionary balances tend to rise with the volume and value of transactions in the economy, and therefore rise with GDP.

Which of the following is most likely a characteristic of real assets? A.) Substantial management costs B.) High liquidity C.) Homogeneity

A is correct. Real assets are characterized by illiquidity, not high liquidity. The heterogeneity of real assets, their illiquidity, and the substantial costs of managing them are all factors that complicate the valuation of real assets

Survivorship bias is most likely an example of which bias? A.) Sample selection B.) Data mining C.) Look-ahead

A is correct. Sample selection bias often results when a lack of data availability leads to certain data being excluded from the analysis. Survivorship bias is an example of sample selection bias.

The proposition that the real interest rate is relatively stable is most closely associated with: A.) the Fisher effect. B.) money neutrality. C.) the quantity theory of money.

A is correct. The Fisher effect is based on the idea that the real interest rate is relatively stable. Changes in the nominal interest rate result from changes in expected inflation.

A firm is considering a project that would require an initial investment of THB270 million (Thai baht). The project will help increase the firm's after-tax net cash flows by THB30 million per year in perpetuity, and it is found to have a negative NPV of THB20 million. The IRR (%) of the project is closest to: A.) 11.1%. B.) 10.3%. C.) 12.0%.

A is correct. The IRR is the discount rate that makes the NPV = 0. Because the cash flow stream is in perpetuity, it can be solved as follows: 0 = −270+(30/IRR) −270+(30/IRR) IRR = 11.1%

Which of the following international trade organizations has a mission to help developing countries fight poverty and enhance environmentally sound economic growth? A.) World Bank Group (World Bank). B.) World Trade Organization (WTO). C.) International Monetary Fund (IMF).

A is correct. The World Bank's mission is to help developing countries fight poverty and enhance environmentally sound economic growth. The World Bank helps to create the basic economic infrastructure essential for creation and maintenance of domestic financial markets and a well-functioning financial industry in developing countries.

Suppose the cost of producing tea relative to copper is lower in Tealand than in Copperland. With trade, the copper industry in Copperland would most likely: A.) expand. B.) contract. C.) remain stable.

A is correct. The copper industry in Copperland would benefit from trade. Because the cost of producing copper relative to producing tea is lower in Copperland than in Tealand, Copperland will export copper and the industry will expand.

Which type of trade restriction would most likely increase domestic government revenue? A.) Tariff. B.) Import quota. C.) Export subsidy.

A is correct. The imposition of a tariff will most likely increase domestic government revenue. A tariff is a tax on imports collected by the importing country's government.

For a Giffen good, the: A.) Demand curve is positively sloped. B.) Substitution effect overwhelms the income effect. C.) Income and substitution effects are in the same direction.

A is correct. The income effect overwhelms the substitution effect such that an increase in the price of the good results in greater demand for the good, resulting in a positively sloped demand curve.

The primary motivation of activist shareholders is to promote: A.) improved shareholder value. B.) environmentally sustainable business practices. C.) consideration of human rights in employee relations.

A is correct. The primary motivation of activist shareholders is to increase shareholder value. If they feel management or the board has failed to act in the best interests of shareholders, they may attempt to force changes by gaining control of the board.

When considering *two mutually exclusive* capital budgeting projects with conflicting rankings—one has a higher positive net present value (NPV), the other has a higher internal rate of return (IRR)—the most appropriate conclusion is to choose the project with the: A.) higher NPV. B.) higher IRR. C.) shorter payback.

A is correct. The project with the higher NPV should be undertaken because NPV measures the increase in wealth as a result of taking the project. For mutually exclusive projects, IRR may give incorrect decisions as a result of scale and/or cash flow timing effects. Payback is not an economically sound method for evaluation of capital projects.

Higher than expected inflation will most likely lead to an increase in: A.) the real wealth of borrowers. B.) investment. C.) the information content of market prices for economic agents.

A is correct. Unexpected inflation that is higher than anticipated will likely result in borrowers benefiting at the expense of creditors as the real value of their borrowing declines.

Which of the following scenarios can best be described as offering superior protection of shareholder interests? A.) When common law is practiced B.) When CEO duality is common C.) When stakeholder theory prevails

A is correct. Unlike civil law systems, common law systems provide judges with the ability to create law by setting precedents that are followed in subsequent cases. Shareholders are viewed as better protected under common law because judges may rule against management actions in situations that are not specifically addressed by statutes.

First-degree price discrimination is best described as pricing that allows producers to increase their economic profit while consumer surplus: A.) is eliminated. B.) increases. C.) decreases.

A is correct. In first-degree price discrimination, the entire consumer surplus is captured by the producer; the consumer surplus falls to zero.

Which of the following most accurately describes a distribution that is more peaked than normal? A.) Leptokurtic B.) Mesokurtic C.) Platykurtic

A is correct. A distribution that is more peaked than normal is called leptokurtic. B is incorrect. A distribution that is neither more peaked nor less peaked than normal is called mesokurtic. C is incorrect. A distribution that is less peaked than normal is called platykurtic.

If the risk-free rate increases, the value of an in-the-money European put option will most likely: A.) decrease. B.) remain the same. C.) increase.

A is correct. An in-the-money European put option decreases in value with an increase in the risk-free rate. A higher risk-free rate reduces the present value of any proceeds received on exercise.

The Austrian economic school attributes the primary cause of the business cycle to: A.) misguided government intervention. B.) the creative destruction of technological progress. C.) sticky price and wage expectations that exaggerate trends.

A is correct. Austrian economists see monetary policy mistakes as leading to booms and busts.

Who most likely determines whether a violation of the CFA Institute Code and Standards or testing policies has occurred and what sanction should be imposed? The: A.) Professional Conduct Staff and the Disciplinary Review Committee B.) Professional Conduct Staff C.) Disciplinary Review Committee

A is correct. Both the Professional Conduct Staff and the Disciplinary Review Committee are responsible for determining whether a violation of the Code and Standards or testing policies has occurred and if so what sanction should be imposed

When claiming GIPS compliance, a firm will least likely have to apply all of the required provisions in the first five major sections of the GIPS standards when investing in: A.) separately managed accounts. B.) equity mutual funds or unit trusts. C.) commodity related portfolios.

A is correct. Certain provisions of Sections 0-5 do not apply to real estate investments, private equity investments and/or separately managed accounts. Private equity, real estate, and separately managed accounts have their own sections within the GIPS standards specific to each respective asset class (Sections 6-8).

Compared with investment-grade bonds, the spread movements on high-yield bonds are influenced: A.) less by interest rate changes and exhibit a greater correlation with movements in equity markets. B.) less by interest rate changes and exhibit a lower correlation with movements in equity markets. C.) more by interest rate changes and exhibit a greater correlation with movements in equity markets.

A is correct. High-yield bonds can be thought of as a hybrid between investment-grade bonds and equity securities. Their spread movements are less influenced by interest rate changes than are investment-grade bonds, and they exhibit greater correlation with movements in equity markets.

Which of the following statements most likely describes a situation that would motivate a manager to issue low-quality financial reports? A.) The manager's compensation is tied to stock price performance. B.) The manager has increased the market share of products significantly. C.) The manager has brought the company's profitability to a level higher than competitors.

A is correct. Managers often have incentives to meet or beat market expectations, particularly if management compensation is linked to increases in stock prices or to reported earnings.

In contrast to over-the-counter options, futures contracts most likely: A.) are not exposed to default risk. B.) represent a right rather than a commitment. C.) are private, customized transactions.

A is correct. Over-the-counter options are exposed to default risk, but futures contracts are standardized transactions that take place on futures exchanges and are not exposed to default risk.

Ricardo Torres, CFA, is a well-respected telecommunications analyst for Pegasus Advisers. He is known for his thorough analysis, including interviews with suppliers, customers, and competitors. Torres has a strong following, and his research reports can often materially affect the market. As a result, Pegasus limits the distribution of his reports to Pegasus clients. After losing market share to Pegasus for over two years, Marco Rodrigo, a CFA candidate, reports Torres to the local securities regulator on suspicion of using insider information to make share recommendations. What CFA Institute Standard of Professional Conduct has Rodrigo most likely violated? A.) Misconduct B.) Material Nonpublic Information C.) Market Manipulation

A is correct. Rodrigo has likely violated Standard I(D)-Misconduct by behaving in an unprofessional manner that reflects adversely on his professional integrity by reporting Torres to the regulator when there is no apparent evidence Torres is using material nonpublic information. Torres is a well-respected analyst known for his in-depth, thorough analysis using a mosaic process. It appears Rodrigo only reported Torres to harm his reputation in order to recapture the market share he has lost over the last two years

The Gordon growth model is most appropriate for valuing the common stock of a dividend paying company that is: A.) mature and relatively insensitive to economic fluctuations. B.) young and just entering the growth phase. C.) experiencing growth that is higher than the sustainable growth rate.

A is correct. The Gordon growth model is most appropriate for valuing common stock of a dividend paying company that is mature and relatively insensitive to the business cycle or economic fluctuations. B is incorrect because a three-stage dividend discount model would be most appropriate for a fairly young company that is just entering the growth phase. C is incorrect because a two-stage dividend discount model would be appropriate for a company that is experiencing a higher than the sustainable growth rate.

The following information is available for a company that prepares its financial statements in accordance with US GAAP: --> It has production facilities with a net book value of $28.4 million. --> Recently, several other companies have entered the market, and the company now estimates that it will be able to generate cash flows of only $3 million per year for the next seven years with its facilities. --> The firm has a cost of capital of 10%. Reflecting these recent events related to its production facilities, the company's financial statements will most likely to report (in millions) A.) $13.8 impairment loss on the income statement. B.) $7.4 reduction in the balance sheet carrying amount. C.) $13.8 reduction in operating cash flows.

A is correct. The company will report an impairment loss of $13.8 million on its income statement. Under US GAAP, the facilities fail the recoverability test: the net book value cannot be recovered from un discounted cash flows (7 years × $3 = $21 < $28.4). Therefore, the asset is impaired and should be written down to its fair value. Fair Value is the present value (PV) of future benefits: (N = 7; i = 10; PMT = 3); PV = 14.6 Impairment Loss is Carrying value − Fair value = 28.4 − 14.6 = 13.8 to be reported on the income statement.

Q. In theory, setting the policy rate equal to the neutral interest rate should promote: A.) stable inflation. B.) balanced budgets. C.) greater employment.

A is correct. The neutral rate of interest is that rate of interest that neither stimulates nor slows down the underlying economy. The neutral rate should be consistent with stable long-run inflation.

An Australian firm purchases a patent for USD20,000 and machinery for USD21,500 from a US firm when the exchange rates are as follows: Exchange Rate USD/EUR -- 1.29 AUD/EUR -- 1.24 The impact of these transactions on the capital account of Australia is closest to: AUD19,225. AUD39,891. AUD20,667.

A is correct. The purchase of machinery is an import and affects the current account, not the capital account, so it is ignored. The purchase of a non-produced, non-financial asset such as a patent affects the capital account. USD20,000 ×(1EUR/1.29USD)×(AUD1.24/1EUR) = 19,225AUD

Which of the following is least likely to be an acceptable approach for accounting standard setting bodies to use when developing accounting standards? A.) Revenue/expense-based B.) Objectives-oriented C.) Rules-based

A is correct. The revenue/expense-based approach is a measurement approach, not a standard setting approach.

Which of the following actions on the part of a central bank is most consistent with increasing the quantity of money? A.) Purchasing securities on the open market B.) Increasing the central bank policy rate C.) Increasing reserve requirements

A is correct. When a central bank purchases securities, bank reserves increase. The banks therefore have excess reserves and are able to increase their lending, increasing the money supply. B is incorrect because the higher the policy rate, the higher the potential penalty that banks will have to pay to the central bank if they run short of liquidity, the greater will be their willingness to reduce lending, and the more likely the money supply will decrease. C is incorrect because if the central bank increases required reserve ratios, the banks will decrease lending and the money supply will decline.

If the GDP deflator values for 2008 and 2010 were 190 and 212.8, respectively, which of the following bestdescribes the annual growth rate of the overall price level? A.) 5.8%. B.) 6%. C.) 12%.

A is correct: (212.8/190)^1/2 - 1 = 0.0583 or 5.8%

Which of the following is most likely required to comply with the GIPS standards regarding input data? Portfolio valuations must: A.) use accrual accounting for all interest earning investments. B.) be obtained from independent third parties. C.) use fair value for periods on or after 1 January 2015.

A.)

An electricity producer charges lower rates to its high-volume customers and higher rates to its low-volume customers. The degree of price discrimination is best described as: A.) second. B.) first. C.) third.

A.) Second-degree price discrimination involves using the quantity purchased as the basis for the pricing of a particular good. B is incorrect because first-degree price discrimination (perfect price discrimination) involves charging each customer their reservation price. C is incorrect because third-degree price discrimination involves segregating customers by demographic or other traits.

With respect to the relationship between output and costs in the short run, a decline in the marginal cost per unit most likely occurs at what level of production? A.) Low output B.) Profit-maximizing output C.) High output

Answer is A Marginal cost per unit, in the short run, decreases at low levels of output as a result of economies from greater specialization. At higher levels of output, however, it eventually increases because of the law of diminishing returns.

If the price elasticity coefficient of the demand curve for paper clips is equal to -1, demand is: A.) elastic. B.) inelastic. C .) unit elastic

Answer is C unit elastic is when elasticity =1

A company is experiencing economies of scale when: A.) cost per unit increases as output increases. B.) it is operating at a point on the LRAC curve where the slope is negative. C.) It is operating beyond the minimum point on the long-run average total cost curve.

A company will shut down production in the short run if total revenue is less than total: A.) fixed costs. B.) variable costs. C.) opportunity costs.

A credit derivative is a derivative contract in which the: A.) clearinghouse provides a credit guarantee to both the buyer and the seller. B.) seller provides protection to the buyer against the credit risk of a third party. C.) the buyer and seller provide a performance bond at initiation of the contract.

A parametric test is most likely preferred to a non-parametric test when: A.) the data are given in ratio or ordinal scale. B.) defined sets of assumptions are given. C.) the population is heavily skewed.

An auditor determines that a company's financial statements are prepared in accordance with applicable accounting standards except with respect to inventory reporting. This exception most likely results in an audit opinion that is: A.) adverse. B.) qualified. C.) unqualified.

An independent audit report is most likely to provide: A.) absolute assurance about the accuracy of the financial statements. B.) reasonable assurance that the financial statements are fairly presented. C.) a qualified opinion with respect to the transparency of the financial statements

Financial risk is least likely affected by: A.) debentures. B.) dividends. C.) long-term leases.

If a company uses a non-GAAP financial measure in an SEC filing, then the company must: A.) give more prominence to the non-GAAP measure if it is used in earnings releases. B.) provide a reconciliation of the non-GAAP measure and equivalent GAAP measure. C.) exclude charges requiring cash settlement from any non-GAAP liquidity measures.

In contrast to normal distributions, lognormal distributions: A.) are skewed to the left. B.) have random variables that cannot be negative. C.) are more suitable for describing asset returns than asset prices.

Interim financial reports released by a company are most likely to be: A.) monthly. B.) unaudited. C.) unqualified.

Short term securities that are cash equivalent and securities (Held for dealing and trading services) A.) Financing activity B.) Operating activity C.) Investing activity

The ___________ school believes variation in the AD curve cause business cycles which is caused by variations in the rate of growth in the money supply, which is most likely causes by inappropriate decisions made by monetary authorities. The central bank should use a policy of steady and predictable increases in the money supply, causes the change in business cycle A.) Keynesians B.) Monetarists C.) Neoclassicial D.) Austrian

The central limit theorem is best described as stating that the sampling distribution of the sample mean will be approximately normal for large-size samples: A.) if the population distribution is normal. B.) for populations described by any probability distribution. C.) if the population distribution is symmetrical.

The daily intraday price performance of a security over a specified period could best be analyzed with which type of chart? A.) Line B.) Candlestick C.) Point and figure

The role of financial statement analysis is best described as: A.) providing information useful for making investment decisions. B.) evaluating a company for the purpose of making economic decisions. C.) using financial reports prepared by analysts to make economic decisions.

To properly assess a company's past performance, an analyst requires: A.) high earnings quality. B.) high financial reporting quality. C.) both high earnings quality and high financial reporting quality.

Under the International Accounting Standards Board's (IASB's) Conceptual Framework, one of the qualitative characteristics of useful financial information is that different knowledgeable users would agree that the information is a faithful representation of the economic events that it is intended to represent. This characteristic is best described as: A.) understandability. B.) verifiability. C.) comparability.

Using the debt-rating approach to find the cost of debt is most appropriate when market prices for a company's debt are: A.) below par value. B.) unreliable. C.) stable.

Which of the following is most likely a *Time series* anomaly in financial markets? A.) Closed-end fund discount B.) Overreaction effect C.) Value effect

Which of the following is most likely a secondary source of liquidity? A.) Bank line of credit B.) Inventory liquidation C.) Trade credit

Which of the following statements best describes a feature of an option contract? In an option contract: A.) both the long and the short can default. B.) only the short can default. C.) only the long can default.

______________ means the amount of observations in each interval of frequency distribution A.) Relative frequency B.) Absolute Frequency C.) Cumulative frequency

if the forward rate exceeds the spot rate A.) the price currency is selling at a premium B.) The Base currency is selling at a premium

If a forward contract requires no cash outlay at initiation, it is most likely true that at initiation: A.) value exceeds price. B.) price exceeds value. C.) price is equal to value.

B At initiation, value is equal to zero. Price is a positive number that states the amount that must be paid when the purchase takes place.

The least likely cause of a decrease in aggregate demand is: A.) higher taxes. B.) a weak domestic currency. C.) a fall in capacity utilization.

B B is correct. A weak domestic currency will result in an increase in aggregate demand at each price level—a rightward shift in the AD curve. A weaker currency will cause a country's exports to be cheaper in global markets. Conversely, imports will be more expensive for domestic buyers. Hence, the net exports component of aggregate demand will increase.

Reviewing the MD&A (Mangt. Discussion and Analysis) section of an annual report is important because: A.) future revenue projections must be disclosed. B.) accounting policies may require subjective judgment by management. C.) management commentary is typically unaudited.

B Companies should disclose in management commentary any critical accounting policies that require management to make subjective judgements that may have a significant impact on reported financial results. These subjective judgements should be carefully reviewed because they may materially alter an analyst's conclusions about the future performance or financial position of a company.

Price elasticity of demand for a good will most likely be greater if: A.) there are no substitutes for the good. B.) consumers consider the good as discretionary. C.) consumers spend a small portion of their budget on the good.

B Consumer discretionary is the term given to goods and services that are considered non-essential by consumers, but desirable if their available income is sufficient to purchase them. Consumer discretionary goods include durable goods, apparel, entertainment

If the income elasticity of demand for a product is -0.6, a: A.) 1% increase in income will result in a 0.6% increase in demand. B.) 1% increase in income will result in a 0.6% decrease in demand. C.) 0.6% increase in income will result in a 1% decrease in demand.

B Income elasticity is a measure of how sensitive quantity demanded is to a change in income. If the income elasticity of demand for the product is -0.6, whenever income increases by 1%, the quantity demanded of the product at each price decreases by 0.6%. Consequently, as income rises, consumers will purchase less of the product.

Which of the following can be measured directly? A.) Potential GDP. B.) Labor productivity. C.) Total factor productivity.

B Labor productivity can be directly measured as output/hour.

A price range in which selling is sufficient to stop the rise in price is best described as: A.) change in polarity. B.) resistance. C.) support.

B Resistance is defined as a price range in which selling activity is sufficient to stop the rise in price. A is incorrect. Change in polarity refers to support, when breached, becomes resistance; resistance, when breached, becomes support. C is incorrect. Support is defined as a low price range in which buying activity is sufficient to stop the decline in price.

One disadvantage of the Herfindahl-Hirschmann Index is that the index: A.) is difficult to compute. B.) fails to reflect low barriers to entry. C.) fails to reflect the effect of mergers in the industry.

B The Herfindahl-Hirschmann Index does not reflect low barriers to entry that may restrict the market power of companies currently in the market.

B The central limit theorem holds without regard for the distribution of the underlying population.

Over time, the market share of the dominant company in an oligopolistic market will most likely: A.) increase. B.) decrease. C.) remain the same.

B The dominant company's market share tends to decrease as profits attract entry by other companies.

If companies earn economic profits in a perfectly competitive market, over the long run the supply curve will most likely: A.) shift to the left. B.) shift to the right. C.) remain unchanged.

B The economic profit will attract new entrants to the market and encourage existing companies to expand capacity.

When total revenue is greater than total variable costs but less than total costs, in the short term a firm will most likely: A.) exit the market. B.) stay in the market. C.) shut down production.

B When total revenue is enough to cover variable costs but not total fixed costs in full, the firm can survive in the short run but would be unable to maintain financial solvency in the long run.

A three-year investment requires an initial outlay of £1,000. It is expected to provide three year-end cash flows of £200 plus a net salvage value of £700 at the end of three years. Its internal rate of return (IRR) is closest to: A.) 10%. B.) 11%. C.) 20%.

B Year -1-2-3-4 Cf -(-1000),(200),(200),(900)

Ethics --> According to the Global Investment Performance Standards (GIPS), which of the following is not a part of the verification process? Testing whether the: A.) firm has complied with all the composite construction requirements. B.) verification is undertaken by the compliance department in the absence of a third party. C.) firm's processes and procedures are designed to calculate results in compliance with GIPS standards.

B because verification tests (Standard V) whether the investment firm has complied with all the composite construction requirements of GIPS on a firm-wide basis, and whether the firm's processes and procedures are designed to calculate and present performance results in compliance with the GIPS Standards. Verification must be performed by an independent third party. A firm cannot perform its own verification.

A member of the labor force quit her job last week and will begin a new job next week. During this interim period, for the purposes of calculating unemployment statistics, this person is most likely classified as: A.) hidden unemployed. B.) frictionally unemployed. C.) voluntarily unemployed.

B is short term and transitory in nature; it includes people who are "between jobs," as in this case, and those who are not working because they are taking time to search for a job that better matches their skills, interests, and other preferences.

Ethics --> Bailey Watson, CFA, manages 25 emerging market pension funds. He recently had the opportunity to buy 100,000 shares in a publicly listed company whose prospects are considered "above industry norm" by most analysts. The company's shares rarely trade because most managers take a "buy and hold" strategy due to the company's small free float. Before placing the order with his dealer, Watson allocated the shares to be purchased according to the weighted value of each of his clients' portfolios. When it came time to execute the trades, the dealer was only able to purchase 50,000 shares. To prevent violating Standard III(B)-Fair Dealing, it would be mostappropriate for Watson to reallocate the 50,000 shares purchased by: A.) Reducing each pension fund's allocation proportionately. B.) Distributing them equally amongst all the pension fund portfolios. C.) Allocating randomly but giving funds left out priority on the next similar type trade.

B Fair Dealing requires members and candidates to deal fairly and objectively with all clients. Certain clients cannot be favored over other clients when their investment objectives and circumstances are similar. Therefore, the most appropriate way to handle the reallocation of an illiquid share is to reduce each client's proportion on a pro rata, or weighted basis.

Monetarists are most likely to believe: A.) there is a causal relationship running from inflation to money. B.) inflation can be affected by changing the money supply growth rate. C.) rapid financial innovation in the market increases the effectiveness of monetary policy.

B B is correct. By definition, monetarists believe prices may be controlled by manipulating the money supply.

A country has a comparative advantage in producing a good if: A.) it is able to produce the good at a lower cost than its trading partner. B.) its opportunity cost of producing the good is less than that of its trading partner. C.) its opportunity cost of producing the good is more than that of its trading partner.

B Comparative advantage is present when the opportunity cost of producing a good is less than that of a trading partner.

Which attribute of financial reports would most likely be evaluated as optimal in the financial reporting spectrum? A.) Conservative accounting choices B.) Sustainable and adequate returns C.) Emphasized pro forma earnings measures

B IS CORRECT these reports have both high financial reporting quality and high earnings quality.

A stock is Rising in price and reaches a price range wherein *Selling activity* is sufficient to stop the Rise . This range is best described as the: A.) Change in polarity point B.) Resistance level C.) Support level

B Resistance level

A prolonged period of an official interest rate very close to zero without an increase in economic growth most likely suggests: A.) quantitative easing must be limited to be successful. B.) there may be limits to the effectiveness of monetary policy. C.) targeting reserve levels is more important than targeting interest rates.

B is Correct A central bank would decrease an official interest rate to stimulate the economy. The setting in which an official interest rate is lowered to zero (or even slightly below zero) without stimulating economic growth suggests that there are limits to monetary policy.

A behavioral bias in which an investor assesses probabilities of outcomes depending on how similar they are to the current state is called: A.) conservatism. B.) representativeness. C.) narrow framing.

B is correct

A expansionary fiscal policy is associated with A.) *Decrease* in government spending and *increase* in tax rates and shift *left* of Agg demand curve. B.) *Increase* in Government spending, *decrease* in tax rates , and shift *right* of Agg demand curve.

B is correct

An investor who owns a mortgage pass-through security is exposed to contraction risk, which is the risk that when interest rates: A.) decline, the security will effectively have a longer maturity than was anticipated at the time of purchase. B.) decline, the security will effectively have a shorter maturity than was anticipated at the time of purchase. C.) rise, the security will effectively have a shorter maturity than was anticipated at the time of purchase.

B is correct

Compared with the occurrence of fundamental developments related to a company, when do technical analysts believe that related security price movements are most likely to arise? A.) After B.) Before C.) Simultaneously

B is correct

In the neoclassical or Solow growth model, an increase in total factor productivity reflects an increase in: A.) returns to scale. B.) output for given inputs. C.) the sustainable growth rate.

B is correct

Low quality earnings most likely reflect: A.) low-quality financial reporting. B.) company activities which are unsustainable. C.) information that does not faithfully represent company activities.

B is correct

Recent trends in corporate governance most likely include: A.) focusing on the corporate governance system's responsibility to maximize shareholder value. B.) expanding the scope to consider the interests of employees, customers, and suppliers. C.) increasing the diversity of corporate governance systems tailored to specific jurisdictions.

B is correct

The goals of the CFA Institute Code of Ethics would *least likely* include: A.) publicly communicating established principles. B.) addressing past ethical failings. C.) fostering public confidence.

B is correct

Wang Dazong, CFA, is a sole proprietor investment advisor. Dazong believes in putting his money at risk along with his clients and trades the same securities as his clients. In order to ensure fair treatment of all accounts, he rotates trade allocations so that each account has an equal likelihood of receiving a fill on their orders. This allocation procedure also applies to Dazong's own account. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, the allocation procedure used by Dazong: A.) complies with the Standards. B.) requires revision to ensure client trades take precedence. C.) should be disclosed and written approval received from clients.

B is correct

__________________ is a measure of the wear and tear (depreciation) of the capital stock that occurs in the production of goods and services. A.) unincorporated business income (proprietors income) B.) Capital Consumption allowance C.)

B is correct

The discouraged worker category is defined to include people who: A.) are overqualified for their job. B.) could look for a job but choose not to. C.) currently look for work without finding it.

B is correct Discouraged workers are defined as persons who have stopped looking for work and are outside the labor force.

During an economic recovery, a lagging unemployment rate is most likely attributable to: A.) businesses quickly rehiring workers. B.) new job seekers entering the labor force. C.) underemployed workers transitioning to higher-paying jobs.

B is correct In an economic recovery, new job seekers return to the labor force, and because they seldom find work immediately, their return may initially raise the unemployment rate.

Which of the following is most likely a private equity strategy? A.) Merger arbitrage B.) Venture capital C.) Quantitative directional

B is correct other two are hedge fund qualities

A nonparametric test is most appropriate when: A.) comparing differences between means. B.) data are given in ranks. C.) data meet distributional assumptions.

B is correct A nonparametric test is used under three circumstances: 1) when the data do not meet distributional assumptions, 2) when the data are given in ranks, and 3) when the hypothesis does not concern a parameter.

Which of the following events will most likely increase the short-term bond yield volatility? A.) Slow economic growth expectation B.) Central bank engaging in expansionary monetary policy C.) High inflation expectation

B is correct A central bank engaging in expansionary monetary policy might cause the yield curve to steepen by reducing short-term interest rates and thus cause greater volatility in short-term bond yields to maturity than in longer-term bonds.

An increase in the official policy rate will most likely lead to: A.) gradual increases in commercial banks' base rates. B.) reduced credit availability. C.) contracting commercial bank liquidity.

B is correct An increase in the policy rate will likely raise the potential penalty that banks will have to pay if they run short of liquidity and thereby reduces their willingness to lend.

Most secondary bond market transactions occur among: Click your answer choice below: A.) Individual investors B.) Institutional investors C.) Sovereign governments.

B is correct An institutional investor holds and manages financial assets for its clients or for itself, and may be distinguished from banks that hold and manage client money. Unlike the secondary equity market where individual investors play a large role, banks and institutional investors dominate the secondary market for bonds.

Francesca "N", CFA, and Grace R work in the same department for New Age Managers with R reporting to N. N learns that R received a Notice of Enquiry from the Professional Conduct Program at CFA Institute regarding a potential cheating violation when he sat for the CFA exam in June. As R's supervisor, N is afraid the behavior of R will be seen as a violation of the CFA Code and Standards. Does N most likely have cause for concern? A.) Yes. B.) No, because her responsibilities do not apply. C.) No, not until Rutabingwa is found guilty of cheating.

B is correct B is correct because a supervisor's responsibilities relate to detecting and preventing violations by anyone subject to their supervision or authority regarding activities they supervise. Ndenda had no way of detecting and/or preventing Rutabingwa from cheating during the CFA exam, if in fact that is what he did, an event she did not attend.

Spot Rate --> USD/EUR - 1.2952 One-Year Forward Rate - USD/EUR - 1.3001 Q. Which of the following statements is most accurate based on the FX quotations in the table? A.) The forward rate is trading at a discount to the spot rate by 0.0049 points. B.) The euro is trading at a forward premium of 49 points. C.) The US dollar is trading at a forward premium of 49 points.

B is correct Because the forward rate exceeds the spot rate for the base currency (euro), the euro is trading at a forward premium of 49 points.

Which statement regarding fiscal policy is most accurate? A.) To raise business capital spending, personal income taxes should be reduced. B.) Cyclically adjusted budget deficits are appropriate indicators of fiscal policy. C.) An increase in the budget surplus is associated with expansionary fiscal policy.

B is correct Cyclically adjusted budget deficits are appropriate indicators of fiscal policy. These are defined as the deficit that would exist if the economy was at full employment (or full potential output).

The most likely outcome when both aggregate supply and aggregate demand increase is: A.) a rise in inflation. B.) higher employment. C.) an increase in nominal GDP.

B is correct Higher aggregate demand (AD) and higher aggregate supply (AS) raise real GDP and lower unemployment, meaning employment levels increase.

A z-test regarding a mean is most appropriate when the variance is unknown and the: A.) sample is not normally distributed. B.) central limit theorem is applicable. C.) sample is small and normally distributed.

B is correct If the population variance is unknown and the sample is large, we can use a z-test relying on the central limit theorem. A is incorrect because a t-test is appropriate in the case of an unknown variance with moderate departures from normality.

In a recession, companies are most likely to adjust their stock of physical capital by: A.) selling it at fire sale prices. B.) not maintaining equipment. C.) quickly canceling orders for new construction equipment.

B is correct Physical capital adjustments to downturns come through aging of equipment plus lack of maintenance.

According to Real Business Cycle models, an economic contraction is most likely caused by: A.) sticky wages. B.) rising energy prices. C.) a contraction in the money supply.

B is correct Real Business Cycle models conclude that expansions and contractions of the economy are responses to external shocks, such as supply shocks arising from advances in technology or changes in the relative prices of inputs (e.g., energy prices). An increase in energy prices shifts short-run aggregate supply to the left, resulting in higher prices and lower GDP.

To test whether a particular portfolio's volatility has changed following the global financial crisis of 2008, an analyst must compare the portfolio's mean monthly returns and the variances of returns of the pre- and post-crisis periods. The most appropriate test is the: A.) chi-square test. B.) F-test. C.) t-statistic.

B is correct The F-test is used to test the equality of two variances. The hypotheses are H0:σ2before=σ2afterH0:σbefore2=σafter2 versus Ha:σ2before≠σ2afterHa:σbefore2≠σafter2 A is incorrect. A chi-square test is employed when we need to test the value of a single population variance. C is incorrect. As explained in choice B.

The primary goal of both monetary and fiscal policy focuses on balancing economic growth and: A.) income distribution. B.) inflation. C.) employment.

B is correct The goal of both monetary and fiscal policy is the creation of an economic environment characterized by positive, stable growth and low, stable inflation.

When the spread between 10-year US Treasury yields and the federal funds rate narrows and at the same time the prime rate stays unchanged, this mix of indicators most likely forecasts future economic: A.) growth. B.) decline. C.) stability.

B is correct The narrowing spread of this leading indicator foretells a drop in short-term rates and a fall in economic activity. The prime rate is a lagging indicator and typically moves after the economy turns.

As the reserve requirement increases, the money multiplier: A.) increases. B.) decreases. C.) remains the same.

B is correct There is an inverse relationship between the money multiplier and the reserve requirement. The money multiplier is equal to 1 divided by the reserve requirement.

Companies most likely have a well-defined supply function when the market structure is: A.) oligopoly. B.) perfect competition. C.) monopolistic competition.

B is correct because A company in a perfectly competitive market must accept whatever price the market dictates. The marginal cost schedule of a company in a perfectly competitive market determines its supply function.

Firms claiming GIPS compliance must make every reasonable effort to provide a compliant presentation to which of the following? A.) Existing clients B.) Prospective clients C.) Both existing and prospective clients

B is correct because GIPS standards state "firms must make every reasonable effort to provide a compliant presentation to all prospective clients." As long as a prospective client has received a compliant presentation within the previous 12 months, the firm has met this requirement. It is a GIPS recommendation, not a requirement, that all clients receive a compliant presentation on an annual basis (0.B.4).

Heidi Katz is a CFA candidate and an analyst at a pension consulting firm. Her father is a major shareholder and managing director at Saturn Partners, a large hedge fund. When assisting in an alternative manager search for a pension client, Katz plans to recommend Saturn's market-neutral strategy because she feels it meets all of the pension plan's criteria. Given this situation, the best course of action for Katz is to: A.) not present this strategy to the client and recommend another strategy. B.) disclose the potential conflict to the pension client when discussing this recommendation. C.) disclose the potential conflict to her employer and follow their guidance regarding disclosure of her relationship to the client.

B is correct because Standard VI(A) requires disclosure of conflicts but does not prohibit members from making recommendations as long as the potential conflicts are appropriately disclosed. A is incorrect because if Katz believes the Saturn strategy is the best available choice she can make this recommendation, but she must disclose the relationship with her father's fund.

William Wong, CFA, is an equity analyst with Hayswick Securities. Based on his fundamental analysis, Wong concludes that the stock of a company he follows, Nolvec Inc., is substantially undervalued and will experience a large price increase. He delays revising his recommendation on the stock from "hold" to "buy" to allow his brother to buy shares at the current price. Wong is *least likely* to have violated the CFA Institute Standards of Professional Conduct related to: A.) duty to clients. B.) reasonable basis. C.) priority of transactions.

B is correct because there is nothing to suggest that Wong does not have a reasonable basis for his conclusion related to Nolvec [Standard V(A)]. A is incorrect because by delaying the revision of his recommendation so that his brother can buy shares at a lower price, he has violated the CFA Institute Standards relating to duty to clients [Standard III(A), Standard VI(B)]. C is incorrect because by delaying the revision of his recommendation so that his brother can buy shares at a lower price, he has violated the CFA Institute Standards relating to priority of transactions [Standard III(A), Standard VI(B)].

If a particular accounting choice is considered aggressive in nature, then the financial performance for the current period would most likely: be neutral. exhibit an upward bias. exhibit a downward bias.

B is correct. Aggressive accounting choices aim to enhance the company's reported performance by inflating the amount of revenues, earnings, and/or operating cash flow reported in the period

An economist expects the following: --> The decline in the unemployment rate will result in higher revenues for home retailers. --> A tighter labor market will put upward pressure on wages, compelling home retailers to raise prices. Q. Which type of inflation best corresponds to the economist's expectations? A.) Stagflation B.) Cost-push inflation C.) Demand-pull inflation

B is correct. Cost-push inflation refers to the situation in which rising costs, usually wages, compel businesses to raise prices.

An alternative investments fund that uses leverage and takes long and short positions in securities is most likely a: A.) leveraged buyout fund. B.) hedge fund. C.) venture capital fund.

B is correct. Hedge funds invest in securities and may take long and short positions. They may also use leverage.

A company wishing to increase earnings in the current period may choose to: A.) decrease the useful life of depreciable assets. B.) lower estimates of uncollectible accounts receivables. C.) classify a purchase as an expense rather than a capital expenditure.

B is correct. If a company wants to increase reported earnings, the company's managers may reduce the allowance for uncollected accounts and uncollected accounts expense reported in the period. Decreasing the useful life of depreciable assets would increase depreciation expense and decrease earnings in the current period.

Which of the following is an off-balance-sheet financing technique? The use of: A.) capital leases. B.) operating leases. C.) the last in, first out inventory method.

B is correct. Operating leases can be used as an off-balance-sheet financing technique because neither the asset nor liability appears on the balance sheet. Inventory and capital leases are reported on the balance sheet.

Which of the following statements is *least accurate* regarding the factors that affect the interest rate risk characteristics of an option-free bond? A.) The lower the coupon rate, the greater the bond's price sensitivity to changes in interest rates. B.) The higher the yield, the greater the bond's price sensitivity to changes in interest rates. C.) The longer the bond's maturity, the greater the bond's price sensitivity to changes in interest rates.

B is correct. Option-free bonds have positive convexity. The higher the yield to maturity, the lower the duration (and thus the lower the interest rate risk).

Participating preference shares are least likely to entitle the shareholders to participate in: A.) additional distribution of the company's assets upon liquidation. B.) corporate decisions through voting rights. C.) additional dividends if the company's profits exceed a predetermined level.

B is correct. Participating preference shares do not entitle the shareholders to participate in corporate decisions through voting rights. But they do entitle them to (1) an additional dividend if the company's profits exceed a prespecified level and (2) additional distribution of the company's assets upon liquidation, above the par.

Quantitative easing, the purchase of government or private securities by the central banks from individuals and/or institutions, is an example of which monetary policy stance? A.) Neutral. B.) Expansionary. C.) Contractionary.

B is correct. Quantitative easing is an example of an expansionary monetary policy stance. It attempts to spur aggregate demand by drastically increasing the money supply.

Which of the following international trade organizations regulates cross-border exchange among nations on a global scale? A.) World Bank Group (World Bank). B.) World Trade Organization (WTO). C.) International Monetary Fund (IMF).

B is correct. The WTO provides the legal and institutional foundation of the multinational trading system and is the only international organization that regulates cross-border trade relations among nations on a global scale. The WTO's mission is to foster free trade by providing a major institutional and regulatory framework of global trade rules. Without such global trading rules, today's global transnational corporations would be hard to conceive.

A government entity that regulates an authorized monopoly will most likely base regulated prices on: marginal cost. long run average cost. first degree price discrimination.

B is correct. This allows the investors to receive a normal return for the risk they are taking in the market.

An analyst gathers the following information about a company: LIFO reserve as of 31 December 2013 --> $420,000 LIFO reserve as of 31 December 2014 --> $450,000 Marginal tax rate --> 30% If the company had used the first-in, first-out (FIFO) method instead of last-in, first-out (LIFO), its 2014 net income would most likely have been: $9,000 higher. $21,000 higher. $30,000 lower.

B is correct. Change in LIFO reserve ($ thousands) = 2014 LIFO reserve − 2013 LIFO reserve = $450 − $420 = $30 FIFO cost of goods sold (COGS) = LIFO COGS − Change in LIFO reserve = LIFO COGS − $30 If an increase in the LIFO reserve occurs, LIFO COGS will be higher than FIFO by the amount of the increase. With a lower COGS under FIFO, pretax income will be higher by $30,000. With a lower COGS under FIFO, after-tax income will be higher by $30,000 × (1 − 0.30) = $21,000.

In a credit default swap, the party that receives a series of cash payments in return for promising to pay compensation for credit losses resulting from a third party's default is most likely the: A.) clearinghouse. B.) seller of the swap. C.) buyer of the swap.

B is correct. A credit default swap is a derivatives contract between a credit protection buyer and a credit protection seller in which the seller receives a series of cash payments from the buyer in return for a promise of compensation for credit losses resulting from a third party's default.

One concern when screening for stocks with low price-to-earnings ratios is that companies with low P/Es may be financially weak. What criterion might an analyst include to avoid inadvertently selecting weak companies? A.) Net income less than zero B.) Debt-to-total assets ratio below a certain cutoff point C.) Current-year sales growth lower than prior-year sales growth

B is correct. A lower value of debt/total assets indicates greater financial strength. Requiring that a company's debt/total assets be below a certain cutoff point would allow the analyst to screen out highly leveraged and, therefore, potentially financially weak companies.

A *profession* is most likely described as a group of people that: A.) has a common level of basic knowledge about a particular subject. B.) monitors its members based on an agreed-on code of ethics. C.) puts the interests of its members first.

B is correct. A profession is practiced by members who share and agree to adhere to a common code of ethics, and a profession is based on a specialized knowledge and skills and service to others.

Which of the following is most likely to lead to a recessionary gap? A.) Rising stock prices B.) Declining consumer confidence C) Easing monetary policy

B is correct. A recessionary gap arises when equilibrium GDP is below potential GDP. Decreased confidence lowers aggregate demand, which, in turn, leads to economic contractions. As demand declines, companies reduce their workforce and the unemployment rate rises.

. Deflation is most likely to be associated with:' A.) a shortage of government revenue. B.) substantial macroeconomic contraction. C.) explicit monetary policy to combat inflation.

B is correct. Deflation is connected to a vicious cycle of reduced spending and higher unemployment.

The least likely explanation for why fiscal policy cannot stabilize aggregate demand completely is that: A.) private sector behavior changes over time. B.) policy changes are implemented very quickly. C.) fiscal policy focuses more on inflation than on unemployment.

B is correct. Fiscal policy is subject to recognition, action, and impact lags.

In contrast to contingent claims, forward commitments provide the: A.) right to buy or sell the underlying asset in the future. B.) obligation to buy or sell the underlying asset in the future. C.) promise to provide credit protection in the event of default.

B is correct. Forward commitments represent an obligation to buy or sell the underlying asset at an agreed upon price at a future date.

Which of the following best describes a fundamental assumption when monetary policy is used to influence the economy? A.) Financial markets are efficient. B.) Money is not neutral in the short run. C.) Official rates do not affect exchange rates.

B is correct. If money were neutral in the short run, monetary policy would not be effective in influencing the economy.

Which of the following would most likely signal that a company may be using aggressive accrual accounting policies to shift current expenses to later periods? Over the last five-year period, the ratio of cash flow to net income has: A.) increased each year. B.) decreased each year. C.) fluctuated from year to year.

B is correct. If the ratio of cash flow to net income for a company is consistently below 1 or has declined repeatedly over time, this may be a signal of manipulation of information in financial reports through aggressive accrual accounting policies.

Assume that a central bank has decided to lower interest rates in the economy. To carry out this policy, the central bank will most likely: A.) increase required reserve requirements. B.) buy securities. C.) sell securities.

B is correct. In implementing monetary policy, central banks have three primary tools available to them: open market operations, setting the official policy rate, and reserve requirements. When the central bank purchases securities (open market operations), it increases the reserves held by private sector banks. These increased reserves lead to a reduction in interest rates on money market securities and, ultimately, to a reduction in other interest rates in the economy A is incorrect because an increased reserve requirement reduces the money supply (as banks can lend out less) and leads to higher interest rates C is incorrect because if the central bank sells securities, reserves fall and interest rates are likely to increase.

Last year, a portfolio manager earned a return of 12%. The portfolio's beta was 1.5. For the same period, the market return was 7.5%, and the average risk-free rate was 2.7%. Jensen's alpha for this portfolio is closest to: A.) 4.50%. B.) 2.10%. C.) 0.75%.

B is correct. Jensen's alpha = 0.12 − [0.027 + 1.5(0.075 − 0.027)] = 0.021, or 2.10%.

The sustainable growth rate is best estimated as: A.) The weighted average of capital and labor growth rates. B.) Growth in the labor force plus growth of labor productivity. C.) Growth in total factor productivity plus growth in the capital-to-labor ratio.

B is correct. Output growth is equal to the growth rate of the labor force plus the growth rate of labor productivity, i.e. output per worker. Unlike total factor productivity, output per worker is observable, so this is the most practical way to approach estimation of sustainable growth.

A company has initiated the process of selling unproductive land, representing 5% of its total assets, and using the proceeds to buy back its common shares. Holding other factors constant, these actions by the company will most likelyresult in a: A.) lower sustainable growth. B.) higher return on equity. C.) higher operating margin.

B is correct. Share buyback reduces equity, holding other factors (e.g., earnings) constant, thus return on equity will be higher.

A group of analysts estimate a security's mean expected value to be $98.00 with a standard deviation of $0.55. Using a confidence interval of plus or minus two standard deviations and given the security is trading at $97.50, the security appears to be: A.) undervalued. B.) fairy valued. C.) overvalued.

B is correct. The confidence interval of the security is between $96.90 ($98 − 2 × $0.55) and $99.10 ($98 + 2 × $0.55). The security price of $97.50 is within the confidence interval so it is fairly valued.

Patent fees and legal services are recorded in which of the following balance of payments components? A.) Capital account. B.) Current account. C.) Financial account.

B is correct. The current account measures the flows of goods and services (including income from foreign investments). Patent fees and legal services are both captured in the services sub-account of the current account.

Movement along the demand curve for good X occurs due to a change in: A.) income. B.) the price of good X. C.) the price of a substitute for good X.

B is correct. The demand curve shows quantity demanded as a function of own price only.

Which of the following is the most likely reason for an analyst to choose the direct method rather than the indirect method for analyzing a firm's operating cash flows? A.) To understand the relationship between net income and operating cash flows B.) To identify operating cash flows by source and by use C.) To avoid making adjustments for non-cash items

B is correct. The direct method cash flow statement presents specific operating cash flows by source and use.

Which of the following is least likely true for a separately managed account (SMA) compared with a mutual fund? A.) Assets are directly owned by the individual. B.) The minimum investment required to open a SMA is lower than that of a mutual fund. C.) Transactions can be tailored to the specific tax needs of the investor.

B is correct. The minimum investment required to open a separately managed account is usually much higher than that to open a mutual fund.

Private contracts, such as bank loan agreements, are most likely to provide an effective disciplinary mechanism to insure high financial reporting quality because: A.) loan covenants require the firm to meet specific financial ratios in order to renew the loan. B.) lenders monitor managers and pay close attention to the firm's financial reports. C.) loan covenants may allow the lender to recover all or part of their investment if certain financial conditions are triggered.

B is correct. The monitoring role of lenders is most likely to insure high-quality financial reports because the lenders inspect financial reports carefully to be sure they are not manipulated.

A BRL/MXN spot rate is listed by a dealer at 0.1378. The 6-month forward rate is 0.14193. The 6-month forward points are closest to: A.) -41.3. B.) +41.3. C.) +299.7.

B is correct. The number of forward points equals the forward rate minus the spot rate, or 0.14193 - 0.1378 = 0.00413, multiplied by 10,000: 10,000 × 0.00413= 41.3 points. By convention, forward points are scaled so that ±1 forward point corresponds to a change of ±1 in the last decimal place of the spot exchange rate.

In theory, money neutrality holds in the long run if: A.) the money supply is positively related to the velocity of circulation of money. B.) increases in the money supply do not influence output and employment. C.) price levels are unaffected by changes in the money supply.

B is correct. The phenomenon of money neutrality states that, in the long run, an increase in the money supply will simply lead to an increase in the price level while leaving real economic variables such as output and employment unaffected.

The pricing of forwards and futures will most likely differ if: A.) interest rates exhibit zero volatility. B.) futures prices and interest rates are negatively correlated. C.) futures prices and interest rates are uncorrelated.

B is correct. The pricing of forwards and futures will differ if futures prices and interest rates are negatively correlated. A negative correlation between futures prices and interest rates makes forwards more desirable than futures in the long position.

The value of a swap is equal to the present value of the: A.) fixed payments from the swap. B.) net cash flow payments from the swap. C.) underlying at the end of the contract.

B is correct. The principal of replication articulates that the valuation of a swap is the present value of all the net cash flow payments from the swap

The structural deficit is equal to the budget deficit: A.) adjusted for inflation. B.) that would exist at full employment. C.) excluding the impact of automatic stabilizers.

B is correct. The structural deficit is the deficit that would exist if the economy was at full employment (or full potential output). Economists often consider the structural deficit as an indicator of the fiscal policy stance.

A financial analyst determines that a company appears to be in the process of accumulating a *"war chest"* It is most likely that she will conclude that it will be used for: A.) recapitalization. B.) strategic acquisitions. C.) share buybacks.

B is correct. The term "war chest" refers to large cash balances that a company accumulates, normally used to finance strategic acquisitions.

he Zera Company has borrowed capital by issuing a number of different securities. Which of the following most likely ranks the highest with respect to priority of payments? A.) Subordinate loan B.) Third lien debt C.) Senior unsecured bond

B is correct. Third lien debt is secured debt. It has a secured interest in the pledged assets and ranks higher than all other unsecured debts.

Collusion is less likely in a market when: A.) the product is homogeneous. B.) companies have similar market shares. C.) the cost structures of companies are similar.

B is correct. When companies have similar market shares, competitive forces tend to outweigh the benefits of collusion.

Which of the following is most likely an element of a strategic analysis of an industry? A.) Corporate governance B.) Macroeconomic influences C.) Product life-cycle

B is correct. The elements that need to be covered in strategic analysis of an industry encompass the macro level (macroeconomic, demographic, governmental, social, and technological influences affecting the industry), the forces driving industry competition (Porter's five forces),

An industry experiencing slow growth, high prices, and volumes insufficient to achieve economies of scale is most likely in the: A.) shakeout stage. B.) embryonic stage. C.) mature stage.

B is correct. An embryonic industry is one that is just beginning to develop and is characterized by slow growth, high prices, volumes not yet sufficient to achieve meaningful economies of scale, developing distribution channels, and low brand loyalty because there is low customer awareness of the industry's product. A is incorrect because a shakeout stage is usually characterized by slowing growth, intense competition, and declining profitability. In this stage, companies also tend to increasingly focus on reducing their cost structure and building brand loyalty.

In order to reduce a trade deficit, the government of a country experiencing full employment moves to depreciate its currency. As a result, if the country's domestic spending declines relative to income, the most likely mechanism that causes this to occur is the: A.) income effect. B.) wealth effect. C.) substitution effect.

B is correct. At full employment, a weaker currency reduces the purchasing power of all domestic currency denominated assets (including the present value of current and future income). Households respond by reducing general expenditures and increasing savings. This response is the wealth effect and reflects the proportion of one's income that is saved (or spent). A is incorrect because the income effect arises when the price of a good changes: with currency depreciation, foreign goods are more expensive, so real purchasing power (income) is reduced.

The tools used by central banks to implement monetary policy most likely include: A.) transfer payments. B.) open market operations. C.) raising or lowering income taxes.

B is correct. Central banks have three primary tools available to them: open market operations, setting the official policy rate, and reserve requirements. A is incorrect because transfer payments are a fiscal policy tool. C is incorrect because raising or lowering income taxes is a part of fiscal policy, not monetary policy.

A credit analyst is most likely to place more focus on: A.) operating leverage than financial leverage. B.) cash flows than accrual income. C.) upside potential than downside risk.

B is correct. Credit analysts are particularly focused on assessing debt-paying ability, which is generated from cash flows and not from accrual-based measures, such as net income.

A high-quality financial report may reflect: earnings smoothing. low earnings quality. understatement of asset impairment.

B is correct. High-quality financial reports offer useful information, meaning information that is relevant and faithfully represents actual performance. Although low earnings quality may not be desirable, if the reported earnings are representative of actual performance, they are consistent with high-quality financial reporting

Information-motivated traders are most likely to differ from pure investors in that they: A.) pay lower transaction fees. B.) expect to earn excess returns. C.) hold well-diversified portfolios.

B is correct. Information-motivated traders expect to earn returns in excess of market returns because they trade on securities they believe the market has over- or undervalued. Unlike pure investors, they expect to earn a return on their information in addition to the normal return expected for bearing risk. Excess returns are generated when the market recognizes and corrects the valuation error on such a security.

As a monetary policy tool, quantitative easing (QE) will most likely help revive an ailing economy in which of the following environments? A.) Deflationary trap B.) Declining bank reserves and economic activity C.) Liquidity trap

B is correct. Quantitative easing (QE) is an "unconventional" approach to monetary policy and is operationally similar to open market purchase operations but conducted on a much larger scale. The additional reserves created by central banks in a policy of quantitative easing can be used to buy any assets. The idea is that this additional reserve will kick-start lending, causing broad money growth to expand, which will eventually lead to an increase in real economic activity.

The return measure that best allows one to compare asset returns earned over different length time periods is the: A.) holding period return. B.) annualized return. C.) net portfolio return.

B is correct. The annualized return is an average return measure that can be calculated using return data for a period that is shorter (or longer) than one year. A is incorrect because the holding period return is defined as the return earned from holding an asset for a single specified period of time.

If a company purchases, at a premium, bonds that it expects to hold until maturity, they are most likely measured on the balance sheet at: A.) historical cost. B.) amortized cost. C.) fair value.

B is correct. The bonds would be a type of financial asset that is measured at amortized cost. This classification applies to financial assets whose cash flows occur on specific dates and consist solely of principal and interest, and if the entity's business model for this investment is to hold the asset to maturity.

In a hypothetical economy, consumption is 70% of pre-tax income, and the average tax rate is 25% of total income. If planned government expenditures are expected to increase by $1.25 billion, the increase in total income and spending, in billions, is closest to: A.) $2.6. B.) $4.2. C.) $1.3.

B is correct. The fiscal multiplier is 1/1−c(1−T) where c = marginal propensity to consume = consumption/disposable income T = the tax rate Assuming pre-tax income of $100 Disposable income: $100 × (1 − 0.25) = $75 Marginal propensity to consume: $70/$75 = 0.933 The fiscal multiplier: 1/[1 − 0.933(1 − 0.25)] = 3.33 With government expenditure of $1.25 billion, total incomes and spending will rise by $1.25 billion × 3.33 = $4.2 billion

A company's optimal capital budget most likely occurs at the intersection of the: A.) net present value and internal rate of return profiles. B.) marginal cost of capital and investment opportunity schedule. C.) marginal cost of capital and net present value profiles.

B is correct. The point at which the marginal cost of capital intersects the investment opportunity schedule is the optimal capital budget.

In applying the principles of expense recognition, companies should: A.) Record any estimates of uncollectible amounts as a direct reduction of revenues. B.) Exclude costs of intangible assets with indefinite useful lives. C.) Recognize credit losses on customer receivables when defaults occur.

B is correct. The two main types of long-lived assets whose costs are not allocated over time are land and those intangible assets with indefinite useful lives.

When considering a portfolio that is optimal for one investor, a second investor with a higher risk aversion would most likely: A.) expect a higher variance for the portfolio. B.) derive a lower utility from the portfolio. C.) have a lower return expectation for the portfolio.

B is correct. Utility has two terms: the expected return and a negative term based on the portfolio risk weighted by risk aversion. For an identical portfolio, the investor with a higher risk aversion (A) would calculate a lower utility (U). U= E(r)−1/2Aσ

A derivative is best described as a financial instrument that derives its performance by: A.) passing through the returns of the underlying. B.)replicating the performance of the underlying. C.) transforming the performance of the underlying.

Common-size financial statements are most likely a component of which step in the financial analysis framework? A.) Collect data B.) Analyze/interpret data C.) Process data

In ________________ random sampling, one divides the population into subpopulations and randomly samples from within the subpopulations. A.) Systematic B.) Simple C.) Stratified

Q. Which of the following most accurately describes a distribution that is LESS peaked than normal? A.) Leptokurtic B.) Mesokurtic C.) Playkurtic

Ratios are an input into which step in the financial statement analysis framework? A.) Process data. B.) Collect input data. C.) Analyze/interpret the processed data.

The ______________ School of business believes *shifts in AD and AS are primarily driven by changes in technology and that business cycles result in temporary deviations from long run equilibrium* cause a shift in business cycle A.) Keynesians B.) Monetarists C.) Neoclassicial D.) Austrian

The degree of price discrimination that is based on segregating customers by demographic or other traits A.) second. B.) first. C.) third.

Using put-call parity, a long call can best be replicated by going: A.) long the put, short the asset, and long the bond. B.) short the put, long the asset, and short the bond. C.) long the put, long the asset, and short the bond.

When testing a hypothesis, the power of a test is best described as the: A.) same as the level of significance of the test. B.) probability of rejecting a true null hypothesis. C.) probability of correctly rejecting the null hypothesis.

Which of the following best describes the role of financial statement analysis? A.) To provide information about a company's performance B.) To provide information about a company's changes in financial position C.) To form expectations about a company's future performance and financial position

Which of the following is an indication that a company may be recognizing revenue prematurely? Relative to its competitors, the company's: A.) asset turnover is decreasing. B.) receivables turnover is increasing. C.) days sales outstanding is increasing.

Which type of triangle pattern most likely exhibits a horizontal trendline connecting the high prices? A.) Triple top B.) Symmetrical C.) Ascending

include purchasing and selling long-term assets and other investments. These long-term assets and other investments include property, plant, and equipment; intangible assets; other long-term assets; and both long-term and short-term investments in the equity and debt (bonds and loans) issued by other companies is classified as a A.) Financing activity B.) Operating activity C.) Investing activity

Which type of primary market bond offering would MOST LIKELY involve an agreement for an investment bank to sell as many bonds as it can in exchange for a commission on bonds sold? Click your answer choice below: A.) Firm commitment offering B.) Underwritten offering C.) Best efforts offering.

C A best efforts offering allows an underwriter or syndicate to do the best it can to sell the bond issue. The underwriter receives a commission for selling each bond, but the underwriter or syndicate does not retain unsold bonds. In a firm-commitment offering, an investment bank (i.e., the underwriter) negotiates an issue price with the issuer for each bond in the offering and takes the risk of selling the bonds at that price. Therefore, a firm commitment offering may also be called an underwritten offering. In an underwritten offering, an investment bank (i.e., the underwriter) negotiates an issue price with the issuer for each bond in the offering and takes the risk of selling the bonds at that price. Therefore, an underwritten offering may also be called a firm-commitment offering.

The full employment, or natural, level of output is best described as: A.) the maximum level obtainable with existing resources. B.) the level at which all available workers have jobs consistent with their skills. C.) a level with a modest, stable pool of unemployed workers transitioning to new jobs.

C At the full employment, or natural, level of output the economy is operating at an efficient and unconstrained level of production. Companies have enough spare capacity to avoid bottlenecks, and there is a modest, stable pool of unemployed workers (job seekers equal job vacancies) looking for and transitioning into new jobs.

An economic forecasting firm has estimated the following equation from historical data based on the neoclassical growth model: Potential output growth = 1.5 + 0.72 × Growth of labor + 0.28 × Growth of capital Q. The coefficient on the growth rate of labor (0.72) in this equation is best interpreted as: A.) the labor force participation rate. B.) the marginal productivity of labor. C.) the share of income earned by labor.

C C is correct. In the standard Solow growth accounting equation, the coefficient on each factor's growth rate is its share of income.

A regulator who requires financial advisers to merely consider the suitability of a product when making recommendations to their clients would most likely be setting: A.) both a legal and an ethical standard. B.) an ethical standard. C.) a legal standard.

C C is correct. The regulator only sets a legal standard when requiring a financial adviser to merely consider suitability when making recommendations to their clients. Requiring advisers to act as fiduciaries would be setting both a legal and an ethical standard; it would require the interests of the client to be above those of the firm or employee.

Monetary policy is *least likely* to include: A.) setting an inflation rate target. B.) changing an official interest rate. C.) enacting a transfer payment program.

C C is correct. Transfer payment programs represent fiscal, not monetary policy.

Prudence Charmaine, a CFA charterholder, was recently accused in writing of cheating on a professional accounting exam. She denied cheating and successfully defended herself against the allegation. As part of her defense and as evidence of her character, Charmaine stated that she is a CFA charterholder and upholds the CFA Institute Code of Ethics and Standards of Professional Conduct. On her next annual Professional Conduct Statement, Charmaine does not report this allegation to CFA Institute. Did Charmaine most likely violate the CFA Institute Code of Ethics or Standards of Professional Conduct? A.) No B.) Yes, she improperly used the CFA Institute Code and Standards to defend herself. C.) Yes, she did not report the allegation on her annual Professional Conduct Statement.

C Charmaine should have reported the cheating allegation when making her annual Professional Conduct Statement. Even though she successfully defended herself against the charges and the charges were dropped, she has a responsibility to report the written complaint involving her integrity. The Code of Ethics requires CFA charterholders to practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.

According to good corporate governance practices, which of the following committees is most likely to have members from executive management? A.) Remuneration B.) Audit C.) Environmental health and safety

C In good corporate governance practices the audit and remuneration/compensation committees should be composed entirely of independent board members. Other committees such as environmental health and safety may have members from executive management.

Given a large random sample, which of the following types of data are least appropriately analyzed with nonparametric tests? A.) Signed data (e.g., number of positives and negatives) B.) Ranked data (e.g., 1st, 3rd) C.) Numerical values (e.g., 28.43, 79.11)

C Nonparametric tests are primarily concerned with ranks, signs, or groups, and they are used when numerical parameters are not known or do not meet assumptions about distributions. Even if the underlying distribution is unknown, parametric tests can be used on numerical data if the sample is large.

Which of the following is most likely a *cross-sectional* anomaly in financial markets? A.) Closed-end fund discount B.) Overreaction effect C.) Value effect

C The value effect—that is, stocks with below-average price-to-earnings and market-to-book ratios and above-average dividend yields have consistently outperformed growth stocks over long periods—is a cross-sectional anomaly.

When a security that was in an upward trend falls 1% below its trendline, a technical analyst will most likelydetermine that: A.) a downward trend is beginning. B.) the upward trend is ending. C.) the trendline needs an adjustment.

C When a security's price drops through the trendline by a significant amount (at least 5% to 10%), this decline signals that the uptrend has ended and further decline may follow. Minor breakthroughs simply call for the trendline to be moderately adjusted over time. A security falling 1% below its trendline is considered a minor breakthrough. A is incorrect. The amount the price falls below the trendline would need to be at least 5% before it would be considered a signal that the uptrend is ending and may signal a further decline in price. B is incorrect. The amount the price falls below the trendline would need to be at least 5% before it would be considered a signal that the uptrend is ending.

Noor Hussein, CFA, runs a financial advisory business, specializing in retirement planning and investments. One of her clients asks her to advise the firm's pension fund trustees on available investments in the market including Islamic products. On the day prior to the meeting, Hussein spends an hour familiarizing herself with Islamic investment products and getting updates on local market conditions. The next day, she recommends Islamic investment products to the trustees based on her research and her expertise in retirement planning and investments. The trustees subsequently incorporate Islamic products into their investment allocation. Did Hussein's basis for the recommendation most likely comply with the CFA Code of Ethics? A.) Yes. B.) No, with regard to Misconduct. C.) No, with regard to Diligence and Reasonable Basis.

C because Hussein did not likely act with competence and diligence as required by Standard V(A). One half day of preparation with regard to Islamic investment products would not likely be considered sufficient to give investment advice to pension plan trustees. Misconduct was not violated by Hussein stating she is an expert in retirement planning and investments because this is the area she specializes in.

The relative strength index for a stock stands at 75. This reading is best described as an indication that the stock is A.) neutral. B.) oversold. C.) overbought.

C relative strength index (RSI) is a momentum oscillator and provides information on whether or not an asset is overbought or oversold. An RSI greater than 70 indicates that a stock is overbought; an RSI lower than 30 suggests that a stock is oversold.

Which of the following most likely results in an increase of owners' equity? A.) Share repurchase B.) Cash dividend C.) New equity issuance

C The basic components of owners' equity are paid-in capital and retained earnings. In the paid-in capital account, an example of an increase in owners' equity is a new equity issuance. Cash dividends reduce retained earnings and owners' equity. Share repurchases reduce paid-in capital and owners' equity.

The confidence interval is most likely to be: A.) wider as the sample size increases. B.) wider as the point estimate increases. C.) narrower as the reliability factor decreases.

C A confidence interval for a parameter = Point estimate ± Reliability factor × Standard error. For example, the reliability factors for confidence intervals based on the standard normal distribution are 1.65 for 90% confidence intervals and 1.96 for 95% confidence intervals. For a given point estimate and standard error, the confidence interval will be narrower with a lower reliability factor. A is incorrect. A larger sample size will reduce standard error making the confidence interval more narrow. B is incorrect. The point estimate does not affect the width of the confidence interval.

Based on typical labor utilization patterns across the business cycle, productivity (output per hours worked) is most likely to be highest: A.) at the peak of a boom. B.) into a maturing expansion C.) at the bottom of a recession.

C At the end of a recession, firms will run "lean production" to generate maximum output with the fewest number of workers.

During the most recent quarter, a steel company in South Korea had the following transactions Bought iron ore from Australia for AUD50 million. Sold finished steel to the United States for USD65 million. Borrowed AUD50 million from a bank in Sydney. Received a USD10 million dividend from US subsidiary. Paid KRW550 million to a Korean shipping company. Q. Which of the following would be reflected in South Korea's current account balance for the quarter? A.) The loan. B.) The shipping. C.) The dividend.

C C is correct. The current account includes income received on foreign investments. The Korean company effectively "exported" the use of its capital during the quarter to its US subsidiary, and the dividend represents payment for those services.

Which of the following best describes the aggregate supply curve in the short-run (e.g., 1 to 2 years)? The short run aggregate supply curve is: A.) flat because output is more flexible than prices in the short run. B.) vertical because wages and other input prices fully adjust to the price level. C.) upward sloping because input prices do not fully adjust to the price level in the short run.

C Due to long-term contracts and other rigidities, wages and other input costs do not fully adjust to changes in the price level in the short-run. Given input prices, firms respond to output price changes by expanding or contracting output to maximize profit. Hence, the SRAS is upward sloping.

A portfolio manager estimates the probabilities of the following events for a mutual fund: Event A: the fund will earn a return of 5%. Event B: the fund will earn a return below 5%. The least appropriate description of the events is that they are: A.) dependent. B.) mutually exclusive. C.) exhaustive.

C Events are exhaustive when they cover all possible outcomes. Mutually exclusive means that only one event can occur at a time. Two events are dependent if the occurrence of one event does affect the probability of occurrence of the other event. In this situation, Event A and B are both mutually exclusive (because they cannot occur at the same time) and dependent (because if one event occurs, the probability of the other becomes zero). However, the two events are not exhaustive because they do not cover the event that the fund will earn a return above 5%.

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

C 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.

Valuation of a swap during its life will *least likely* involve the: A.) application of the principle of no arbitrage. B.) use of replication. C.) investor's risk aversion.

C Risk neutrality, not risk aversion, is a key element of derivatives pricing, including swaps.

The most likely initial (short-run) effect of demand-pull inflation is an increase in: A.) finished good prices. B.) employee wages. C.) commodity prices.

C is Correct The effect of demand-pull inflation is an increase in the aggregate demand, which, in turn, leads to an increase (initially) in commodity prices

At expiration, a European put option will be valuable if the exercise price is: A.) less than the underlying price. B.) equal to the underlying price. C.) greater than the underlying price.

C is correct

In a comprehensive financial analysis, financial statements should be: used as reported *without adjustment*. A.) adjusted after completing ratio analysis. B.) adjusted for differences in accounting standards, such as C.) international financial reporting standards and US generally accepted accounting principles.

C is correct

In using matrix pricing to estimate the required yield spread on a new corporate bond issue, the benchmark rate used is most likely to be the: A.) coupon rate on a government bond with a similar time to maturity. B.) yield to maturity on a corporate bond with similar credit risk and time to maturity. C.) yield to maturity on a government bond with a similar time to maturity.

C is correct

The slope of the security market line is best derived from the: A.) risk-free rate of return. B.) beta of the security. C.) market risk premium.

C is correct

The time-weighted rate of return: A.) results in a lower return when compared with the money-weighted rate of return. B.) is affected by the amount and timing of cash flows to and from a portfolio. C.) calculates multi-period cash flows mirroring a portfolio's compound growth rate.

C is correct

To better evaluate the solvency of a company, an analyst would most likely add to total liabilities: A.) the present value of future capital lease payments. B.) the total amount of future operating lease payments. C.) the present value of future operating lease payments.

C is correct

Which of the following statements best describes a feature of any probability function of a random variable The probability function: A.) has a value between −1 and +1. B.) has the same value for all outcomes. C.) specifies the likelihood that a particular outcome of a random variable will occur.

C is correct

A decrease in the price of a good will most likely be reflected in a: A.) change in the intercept of the demand curve. B.) change in the slope of the demand curve. C.) downward movement along the demand curve.

C is correct A decrease in the price of a good will cause consumers to demand more of a good and be reflected by a downward movement along the demand curve.

If a test rejects the hypothesis that market prices reflect private information but does not reject the hypothesis that they reflect past market data and public information, then the form of market efficiency is best described as: A.) weak. B.) strong. C.) semi-strong.

C is correct Past -- Public -- Private Weak X Semi Strong X X Strong X X X

Compared with public equity markets, which of the following statements is most accurate about private equity markets? Operating in the private market: A.) offers stronger incentives to improve corporate governance. B.) allows more opportunities to raise capital. C.) allows management to better adopt a long-term focus.

C is correct . The management of a public firm is under pressures to meet shorter-term demands, such as meeting quarterly sales and earnings projections from analysts. Private owners are thus better able to focus on longer-term value creation opportunities.

The number of permutations that are possible when choosing 4 objects from a total of 10 objects is closest to: 30. 210. 5,040.

C is correct 10!/(10 − 4)! = 10!/6! = 5,040.

The change in polarity principle most likely helps analysts determine a new: A.) support level after a retracement to a lower high than a previous retracement. B.) resistance level after an upward breakthrough of the trendline. C.) support level after a resistance level is breached.

C is correct A key tenet of support and resistance levels in technical analysis is the change in polarity principle, which states that once a support level is breached, it becomes a resistance level. The same holds true for resistance levels: once breached, they become support levels. A is incorrect. The change in polarity principle states that once a support level is breached, it becomes a resistance level; it does not help determine a new support level during an ongoing downtrend. B is incorrect. The change in polarity principle states that once a resistance level is breached, it becomes a support level; it does not help determine a new resistance level during an ongoing upward trend.

Which of the following statements is least accurate? A.) IFRS Foundation trustees appoint members of the IASB. B.) The IASB is monitored by a board that includes the US SEC. C.) IFRS Foundation trustees oversee the policy decisions of the FASB.

C is correct C is correct. The Financial Accounting Foundation, not the IFRS, oversees FASB. A is incorrect because IFRS Foundation trustees do appoint the members of the IASB. B is incorrect because the Monitoring Board that oversees the IASB includes representatives from the European Commission, IOSCO, the Japan Financial Services Agency, and the US SEC.

When analyzing a head and shoulders pattern that represents the reversal of an upward trend, the highest trading volume is most likely on the upward side of the: A.) right shoulder. B.) head. C.) left shoulder.

C is correct In the classic head and shoulders pattern, the left shoulder shows a strong rally on strong volume, followed by a reversal back to the price level where it started. The head is a more pronounced version of the left shoulder but on lower volume. The right shoulder is a mirror image of the left shoulder, also on lower volume.

A firm is operating beyond minimum efficient scale in a perfectly competitive industry. To maintain long-term viability the most likely course of action for the firm is to: A.) operate at the current level of production. B.) increase its level of production to gain economies of scale. C.) decrease its level of production to the minimum point on the long-run average total cost curve.

C is correct The firm operating at greater than long-run efficient scale is subject to diseconomies of scale. It should plan to decrease its level of production.

Which of the following secondary market mechanisms would MOST LIKELY match bond buyers and sellers at various locations directly via a computerized network? Click your answer choice below: A.) Private placements B.) Organized exchanges C.) Over-the-counter markets.

C is correct The secondary market (or after market) provides an opportunity for investors to trade existing issues. Over-the-counter markets match buyers and sellers at various locations via a computerized network and conduct the vast majority of trades throughout the world.

In the underwriting process, the lead bank would most likely announce the final price to the public: Click your answer choice below: A.) During the subscription period B.) Before the subscription period C.) After the subscription period.

C is correct The subscription period for a bond issue allows the underwriter to receive indications of interest from potential buyers. An over-subscribed bond, for example, may eventually sell at a higher price (lower yield) than a bond without much interest. Therefore, the underwriter recommends the final price to an issuer after the subscription period. The underwriter announces a bond price after the subscription period rather than during to allow indications of interest to establish demand and, therefore, price. The underwriter announces a bond price after the subscription period rather than before to allow indications of interest to establish demand and, therefore, price.

A country with a persistent trade surplus is being pressured to let its currency appreciate. Which of the following best describes the adjustment that must occur if currency appreciation is to be effective in reducing the trade surplus? A.) Domestic investment must decline relative to saving. B.) Foreigners must increase investment relative to saving. C.) Global capital flows must shift toward the domestic market.

C is correct The trade surplus cannot decline unless the capital account deficit also declines. Regardless of the mix of assets bought and sold, foreigners must buy more assets from (or sell fewer assets to) domestic issuers/investors.

Mutual funds that hold high cash positions are most likely viewed by technical analysts as being: A.) neutral. B.) bearish. C.) bullish.

C is correct When mutual funds hold high cash positions, the cash represents buying power that will move prices higher when the funds are used to add positions to the portfolio. Therefore, technical analysts view mutual funds that hold high cash positions as a bullish indicator.

According the GIPS standards, for periods beginning on or after 1 January 2011, the aggregate fair value of total firm assets most likely includes all: A.) fee-paying discretionary accounts. B.) fee- and non-fee-paying discretionary accounts. C.) fee- and non-fee-paying discretionary and non-discretionary accounts.

C is correct because for periods beginning on or after 1 January 2011, total firm assets must include the aggregate fair value of all discretionary and non-discretionary assets managed by the firm. This includes both fee-paying and non-fee-paying portfolios (0.A.13).

Charlie Mancini, CFA, is the Managing Director for Business Development at SV Financial (SVF), a large US-based mutual fund organization. Mancini has been under pressure recently to increase revenues. In order to secure business from a large hedge fund manager based in Asia, Mancini recently approved flexible terms for the fund's client agreement. To allow for time zone differences, the agreement permits the hedge fund to trade in all of SVF's mutual funds six hours after the close of US markets, which is prohibited by US regulators. Did Mancini violate any CFA Institute Standards of Professional Conduct? A.) No. B.) Yes, with regard to Fair Dealing. C.) Yes, with regard to Fair Dealing and Material Nonpublic Information.

C is correct because clients should be treated fairly and impartially [Standard III(B)]. In addition, the flexible trading terms allow the hedge fund manager to enrich themselves and is a violation of Standard II(A), concerning trading on material nonpublic information. This is also a conflict of interest [Standard VI(A)-Disclosure of Conflicts]. A is incorrect because violations of several Standards have occurred. B is incorrect because a violation of the Fair Dealing standard has occurred.

Benefits of compliance with the CFA Institute Global Investment Performance Standards (GIPS) least likely include: A.) strengthening of internal controls. B.) participation in competitive bidding. C.) elimination of in-depth due diligence for investors.

C is correct because compliance with the GIPS standards does not eliminate the need for in-depth due diligence on the part of the investor. A is incorrect because compliance with GIPS standards may strengthen internal controls. B is incorrect because compliance with GIPS standards enables a firm to participate in competitive bids against other compliant firms throughout the world.

A fund manager would like to estimate the probability of a daily loss higher than 5% on the fund he manages. He decides to use a method that uses the relative frequency of occurrence based on historical data. The resulting probability is best described as a(n): A.) subjective probability. B.) a priori probability. C.) empirical probability.

C is correct. An empirical probability is a probability estimated from data as a relative frequency of occurrence.

in practice, both a fixed parity regime and a target zone regime allow the exchange rate to float within a band around the parity level. The most likely rationale for the band is that the band allows the monetary authority to: be less active in the currency market. earn a spread on its currency transactions. exercise more discretion in monetary policy.

C is correct. Fixed exchange rates impose severe limitations on the exercise of independent monetary policy. With a rigidly fixed exchange rate, domestic interest rates, monetary aggregates (e.g., money supply), and credit conditions are dictated by the requirement to buy/sell the currency at the rigid parity. Even a narrow band around the parity level allows the monetary authority to exercise some discretionary control over these conditions. In general, the wider the band, the more independent control the monetary authority can exercise.

A forward rate agreement most likely differs from most other forward contracts because: A.) positions cannot be closed out prior to maturity. B.) it involves an option component. C.) its underlying is not an asset.

C is correct. Forward rate agreements, unlike most other forward contracts, do not have an asset as an underlying. Instead, the underlying is an interest rate.

Raising the reserve requirement is most likely an example of which type of monetary policy? A.) Neutral. B.) Expansionary. C.) Contractionary.

C is correct. Raising reserve requirements should slow money supply growth.

A synthetic collateralized debt obligation is a CDO backed by a portfolio of: A.) leveraged bank loans. B.) residential or commercial mortgage-backed securities. C.) credit default swaps.

C is correct. Synthetic collateralized debt obligations are CDOs that are backed by a portfolio of credit default swaps.

A central bank will most likely allow the economy to self-correct in periods of: A.) high inflation, fast economic growth, and low unemployment. B.) low inflation, slow economic growth, and high unemployment. C.) high inflation, slow economic growth, and high unemployment.

C is correct. This scenario is often referred to as stagflation. Here, the economy is likely to be left to self-correct because no short-term economic policy is thought to be effective.

As the expansion phase of the business cycle advances from early stage to late stage, businesses most likely experience *a decrease in*: A.) labor costs. B.) capital investment. C.) availability of qualified workers.

C is correct. When an economy's expansion is well established, businesses often have difficulty finding qualified workers.

A Type I error is best described as the probability of: A.) failing to reject a false null hypothesis. B.) rejecting a true alternative hypothesis. C.) rejecting a true null hypothesis.

C is correct. A Type I error is the mistake of rejecting the null hypothesis when it is, in fact, true.

If a company has a deferred tax asset reported on its statement of financial position and the tax authorities reduce the tax rate, which of the following statements is most accurate concerning the effect of the change? The existing deferred tax asset will: A.) not be affected. B.) increase in value. C.) decrease in value.

C is correct. A decrease in the tax rate will result in a decrease in the previously reported amounts of deferred tax assets. That is, the value of the future tax assets, based on the new lower rate, is reduced for offsetting future tax payments.

Which of the following is not a condition of an ideal currency regime? A.) Fully convertible currencies. B.) Fully independent monetary policy. C.) Independently floating exchange rates.

C is correct. An ideal currency regime would have credibly fixed exchange rates among all currencies. This would eliminate currency-related uncertainty with respect to the prices of goods and services as well as real and financial assets.

. The characteristic of national consumer price indexes which is most typically shared across major economies worldwide is: A.) the geographic areas covered in their surveys. B.) the weights they place on covered goods and services. C.) their use in the determination of macroeconomic policy.

C is correct. Central banks typically use consumer price indexes to monitor inflation and evaluate their monetary policies.

Which sampling-related bias is most likely to result in finding apparent significance when none exists? A.) Sample selection bias B.) Look-ahead bias C.) Data mining bias

C is correct. Data mining bias comes from overuse or misuse of the data and can result in finding models or patterns where none exist. A is incorrect. Sample selection bias often results when data availability leads to certain data being excluded from the analysis. B is incorrect. Look-ahead bias exists if the model uses data not available to the analyst at the time the analyst acts on the model.

Stagflation is best described as an economic situation involving high inflation and high: A.) economic growth. B.) aggregate supply. C.) unemployment.

C is correct. Declines in short-run aggregate supply bring about stagflation, an economic situation with a combination of high inflation and high unemployment.

The least likely goal of a government's fiscal policy is to: A.) redistribute income and wealth. B.) influence aggregate national output. C.) ensure the stability of the purchasing power of its currency.

C is correct. Ensuring stable purchasing power is a goal of monetary rather than fiscal policy. Fiscal policy involves the use of government spending and tax revenue to affect the overall level of aggregate demand in an economy and hence the level of economic activity.

The elasticity of demand for a good is most likely greater when: A.) a lesser proportion of income is spent on the good. B.) the good is a necessity. C.) the adjustment to a price change takes a longer time.

C is correct. For most goods and services, the long-run demand is much more elastic than the short-run demand. For example, if gas prices rise, consumers cannot quickly change their mode of transportation but will likely do so in the longer run.

Which of the following organizations helps to keep global systemic risk under control by preventing contagion in scenarios such as the 2010 Greek sovereign debt crisis? A.) World Bank Group (World Bank). B.) World Trade Organization (WTO). C.) International Monetary Fund (IMF)

C is correct. From an investment perspective, the IMF helps to keep country-specific market risk and global systemic risk under control. The Greek sovereign debt crisis on 2010, which threatened to destabilize the entire European banking system, is a recent example. The IMF's mission is to ensure the stability of the international monetary system, the system of exchange rates and international payments which enables countries to buy goods and services from each other.

An economist states that the probability of having the gross domestic product (GDP) of a country higher than 3% is 0.20. What are the odds against a GDP higher than 3%? A.) 5 to 1 B.) 6 to 1 C.) 4 to 1

C is correct. Given the probability of an event, P(E), the odds against that event are: [1−P(E)]P(E)1−P(E)P(E). By using the input of the problem, Odds against E = (1−0.2)/0.2 = 4. This means that given the probability stated by the economist, the odds against a GDP above 3% are 4 to 1.

Which of the following indicators is most appropriate in predicting a turning point in the economy? A.) The Industrial Production Index B.) The average bank prime lending rate C.) Average weekly hours, manufacturing

C is correct. Leading economic indicators have turning points that usually precede those of the overall economy. Average weekly hours, manufacturing is a leading economic indicator. The Industrial Production Index is a coincident economic indicator, and the average bank prime lending rate is a lagging economic indicator.

Assume that the central bank reduces the reserve requirement. The most likely effect will be: A.) a decrease in the money supply. B.) a decrease in new deposits. C.) an increase in the money multiplier.

C is correct. Reducing the reserve requirement will increase the money supply, money multiplier, and new deposits. A is incorrect because the money supply will increase. B is incorrect because new deposits will increase.

--> compute tangible book value, an analyst would: A.) add goodwill to stockholders' equity. B.) add all intangible assets to stockholders' equity. C.) subtract all intangible assets from stockholders' equity.

C is correct. Tangible book value removes all intangible assets, including goodwill, from the balance sheet.

A company has an unsecured line of credit and needs to maintain its EBIT-to-interest coverage ratio greater than 2.0. Its EBIT is estimated to be between $36 million and $48 million, with all values equally likely. If the forecasted interest charge for the year is $20 million, the probability that EBIT/interest will be more than 2.0 is closest to: A.) 61.5%. B.) 33.3%. C.) 66.7%.

C is correct. The EBIT-to-interest ratio is equal to 2.0 when the EBIT is $40 million. Given that the values between $36 million and $48 million are equally likely, the probability of the ratio being equal to or less than 2.0 is 33.3% (= [$40 million − $36 million]/[$48 million − $36 million]). Consequently, the probability of the ratio being greater than 2.0 is 66.7% (i.e., 1 − Probability of the ratio being equal to or less than 2.0).

Over the past month, the Swiss Franc (CHF) has depreciated 12 percent against pound sterling (GBP). How much has the pound sterling appreciated against the Swiss Franc? A.) 12% B.) Less than 12% C.) More than 12%

C is correct. The appreciation of sterling against the Swiss franc is simply the inverse of the 12% depreciation of the Swiss franc against Sterling: [1/(1 - 0.12)] - 1 = (1/0.88) - 1 = 0.1364, or 13.64%.

Which of the following is most likely a benefit of debt covenants for the borrower? A.) Limitations on the company's ability to pay dividends B.) Restrictions on how the borrowed money may be invested C.) Reduction in the cost of borrowing

C is correct. The reduction in the cost of borrowing is a benefit of covenants to the borrower.

Which of the following counterparties is most likely to be considered a sell-side foreign-exchange market participant? A.) A large corporation that borrows in foreign currencies. B.) A sovereign wealth fund that influences cross-border capital flows. C.) A multinational bank that trades foreign exchange with its diverse client base.

C is correct. The sell side generally consists of large banks that sell foreign exchange and related instruments to buy-side clients. These banks act as market makers, quoting exchange rates at which they will buy (the bid price) or sell (the offer price) the base currency.

A stock is declining in price and reaches a price range wherein buying activity is sufficient to stop the decline. This range is best described as the: A.) change in polarity point. B.) resistance level. C.) support level.

C is correct. The support level is defined to be a low price range in which buying activity is sufficient to stop the decline in price.

A forward premium indicates: A.) an expected increase in demand for the base currency. B.) the interest rate is higher in the base currency than in the price currency. C.) the interest rate is higher in the price currency than in the base currency.

C is correct. To eliminate arbitrage opportunities, the spot exchange rate (S), the forward exchange rate (F), the interest rate in the base currency (ib), and the interest rate in the price currency (ip) must satisfy: FS=(1+ip1+ib) According to this formula, the base currency will trade at forward premium (F > S) if, and only if, the interest rate in the price currency is higher than the interest rate in the base currency (ip > ib).

An analyst reviewing a firm with a large, current-period restructuring charge to earnings should: A.) view expenses reported in prior years as overstated. B.) disregard it because it is solely related to past events. C.) consider making pro forma adjustments to prior years' earnings.

C is correct. To extrapolate historical earnings trends, an analyst should consider making pro forma analytical adjustments of prior years' earnings to reflect in those prior years a reasonable share of the current period's restructuring and impairment charges.

From the point of view of an investor, unethical behavior by investment professionals can most likely lead to which of the following? A.) Increased willingness to accept risk B.) Rise in the demand for investments C.) Demand for a higher return

C is correct. Unethical behavior erodes and destroys trust. Investors with low levels of trust are less willing to accept risk and, therefore, will likely demand a higher return for the use of their capital. They may also choose to invest elsewhere or to not invest at all.

Which of the following is least likely a part of the execution step of the portfolio management process? A.) Security analysis B.) Portfolio construction C.) Performance measurement

C is correct. Performance measurement is a part of the feedback step of the portfolio management process. The execution step includes asset allocation, security analysis, and portfolio construction. A is incorrect because security analysis is a part of the execution step of the portfolio management process.

A high convenience yield is most likely associated with holding: A.) bonds. B.) equities. C.) commodities.

C is correct. Convenience yield is primarily associated with commodities and generally exists as a result of difficulty in shorting the commodity or unusually tight supplies.

What is the most important effect of labor productivity in a cost-push inflation scenario? A.) Rising productivity indicates a strong economy and a bias towards inflation. B.) The productivity level determines the economy's status relative to its "natural rate of unemployment." C.) As productivity growth proportionately exceeds wage increases, product price increases are less likely.

C is correct. For productivity, or output per hour, the faster that it can grow, the further that wages can rise without putting pressure on business costs per unit of output.

In a currency swap, the underlying principal amount is exchanged: A.) only at the start of the swap. B.) only at the end of the swap. C.) both at the start and at the end of the swap.

C is correct. In a currency swap, the underlying principal is denominated in different currencies and is typically exchanged at the start and end of the swap.

In efficient financial markets, risk-free arbitrage opportunities: A.) will not exist. B.) may persist in the long run. C.) may exist temporarily.

C is correct. In efficient financial markets, risk-free arbitrage opportunities may exist temporarily, but their continuous exploitation will eliminate these arbitrage opportunities in the long run.

Based on the elasticities approach, a country can implement an exchange rate policy to improve its trade balance most effectively if it imports and exports products: A.) that are consumer necessities. B.) with no good substitute. C.) traded in competitive markets.

C is correct. In the elasticities approach, changes in exchange rate policy will be a more-effective mechanism for trade balance adjustment if a country imports and exports products that trade in competitive markets, with good substitutes, and luxury products rather than necessities. A and B are incorrect because in the elasticities approach, changes in exchange rate policy will be a more-effective mechanism for trade balance adjustment if a country imports and exports products that trade in competitive markets, with good substitutes, and luxury products rather than necessities.

Which of the following bonds are most likely to be bearer bonds? A.) Foreign bonds B.) Domestic bonds C.) Eurobonds

C is correct. Most Eurobonds are bearer bonds, meaning that the trustee does not keep records of who owns the bonds; only the clearing system knows who the bond owners are.

Replication is most likely used to: A.) reduce portfolio risk. B.) increase leverage. C.) exploit pricing differentials.

C is correct. Replication is the process of creating an asset or portfolio from another asset, portfolio, and/or derivative. It is used to exploit pricing differentials.

According to the concept of money neutrality, over the long term, the money supply is least likely to affect: A.) inflation expectations. B.) inflation. C.) the real rate of interest.

C is correct. The concept of money neutrality implies that an increase in the money supply will leave real variables like output and employment unaffected. The real rate of interest will be unaffected by money supply changes but inflation and inflation expectations will be affected.

The crowding-out effect is most likely associated with: A.) falling real interest rates. B.) decreasing government borrowing. C.) increasing government borrowing.

C is correct. The tendency for government borrowing to decrease private sector investment is called the crowding-out effect.

A company incurred the following unrealized holding gains in the current year: $100,000 on securities (held for trading) $500,000 on the foreign currency translation adjustment of a self-sustaining non-domestic subsidiary Other comprehensive income for the year is closest to: $600,000. $100,000. $500,000.

C is correct. Unrealized holding gains foreign currency translation adjustments are included in other comprehensive income. Gains for securities (held for trading) --> are included in net income

What is the ratio for inventory turnover? (Days on hand)

COGS/ AVG Inventory

What is the ratio for payables turnover?

COGS/Average A/ P )

The ____________ school believes government intervention causes business of cycle. the artificial force of interest rates down cause firms to put too much into speculative lines of production compared to actual demand. This causes a contraction when the lines don't turn out properly, A.) Keynesians B.) Monetarists C.) Neoclassicial D.) Austrian

__________________ are workers without a job but have given up searching for work and so are not classified as being unemployed.

Discouraged workers

Which of the following most likely contributes to a current account deficit? A.) High taxes. B.) Low private savings. C.) Low private investment. D.) High private investment E.) Both B and D

E is correct A current account deficit tends to result from low private saving, high private investment, a government deficit, or a combination of the three. Of the choices, only low private savings contributes toward a current account deficit.

Under GAAP research and development costs are____________ Under IFRS Research is _______________ and Development costs are ________________ *if the company can prove that the asset in development will become commercially viable*

Expensed Expensed Capitalized

The goods and services produced by UK citizens who are working in the United States are most likely included in the: GDP of the United Kingdom and GNP of the United States. GNP of the United Kingdom and GDP of the United States. GNP of the United Kingdom and GNP of the United States.

GDP measures the market value of all final goods and services produced by factors of production located within a country during a given period. GNP measures the market value of all final goods of services produced by factors of production supplied by residents of country, regardless of where they are located. Production by UK citizens working in the United States is included in the United Kingdom's GNP and the United States' GDP.

A company issues new 20-year $1,000 bonds with a coupon rate of 6.2% payable semiannually at an issue price of $1,030.34. Assuming a tax rate of 28%, the firm's annual after-tax cost of debt (%) is closest to: A.) 5.94. B.) 4.28. C.) 4.46.

PV = −1,030.34, FV = 1,000, N = 40 (20 × 2), PMT = 31 (0.062 × 1,000 × 0.5), i = 2.97 semiannually Annually, YTM = 2.97 × 2 = 5.94

An analyst determines that 60% of all US pension funds hold hedge funds. In evaluating this probability, a random sample of 10 US pension funds is taken. Using the binomial probability function, the probability that exactly 6 of the 10 firms in the sample hold hedge funds is closest to: A.) 60.0%. B.) 11.2%. C.) 25.1%.

Pic #54

An analyst has calculated the following ratios for a company: Operating profit margin -- 17.5% Net profit margin -- 11.7% Total asset turnover -- 0.89x Return on assets (ROA) -- 10.4% Financial leverage -- 1.46 Debt to equity -- 0.46 The company's return on equity (ROE) is closest to: 22.7%. 4.8%. 15.2%.

ROE = Net profit margin×Asset turnover×Financial leverage 11.7×0.89×1.46 = 15.2% or ROE = ROA * Financial Leverage 10.4 * 1.46 = 15.2

What is the ratio for Receivables (Days of sales outstanding)

Sales/ Average A/R

Which of the following international trade bodies was the only multilateral body governing international trade from 1948 to 1995? World Trade Organization (WTO). International Trade Organization (ITO). General Agreement on Tariffs and Trade (GATT).

The GATT was the only multilateral body governing international trade from 1948 to 1995. It operated for almost half a century as a quasi-institutionalized, provisional system of multilateral treaties and included several rounds of negotiations.

An exchange rate between two currencies has increased to 1.4500. If the base currency has appreciated by 8% against the price currency, the initial exchange rate between the two currencies was closest to: 1.3340. 1.3426. 1.5660.

The percentage appreciation of the base currency can be calculated by dividing the appreciated exchange rate by the initial exchange rate. In this case, the unknown is the initial exchange rate. The initial exchange is the value of X that satisfies the formula:1.4500/X = 1.08 Solving for X leads to 1.45/1.08 = 1.3426.

A fixed exchange rate regime in which the monetary authority is legally required to hold foreign exchange reserves backing 100% of its domestic currency issuance is best described as: A.) dollarization. B.) a currency board. C.) a monetary union.

With a currency board the monetary authority is legally required to exchange domestic currency for a specified foreign currency at a fixed exchange rate. It cannot issue domestic currency without receiving foreign currency in exchange, and it must hold that foreign currency as a 100% reserve against the domestic currency issued. Thus, the country's monetary base (bank reserves plus notes and coins in circulation) is fully backed by foreign exchange reserves.

The following information is available for a company: - Bonds are priced at par and have an annual coupon rate of 9.2%. - Preferred stock is priced at $8.18 and pays an annual dividend of $1.35. - Common equity has a beta of 1.3. - The risk-free rate is 4% and the market premium is 11%. - Capital structure: Debt = 30%; Preferred stock = 15%; Common equity = 55%. - The tax rate is 35%. Q. The weighted average cost of capital (WACC) for the company is closest to: A.) 11.5%. B.) 14.3%. C.) 13.4%.

cost of debt = 9.2% cost of preferred stock = 1.35/8.18 Cost of Equity = .04 + 1.3(.11) = 18.3 Wacc = (.3*9.2*(1-.35)) + (.15*.165) + (.55 * .183) = 14.3%

Which of the following derivatives is least likely to have a value of zero at initiation of the contract? A.) Futures B,) Options C.) Forwards

no money changes hands at the (initiation) beginning of a forward or futures contract So value at initiation is 0

The interest rate that a central bank sets and that it announces publicly is normally the rate at which it is willing to lend money to the commercial banks is called the ____________________ A.) Federal funds rate B.) Official policy rate

official policy rate The federal funds rate is is the interbank lending rate on overnight borrowings of reserves Federal funds rate is the overnight rate banks use to lend to one another

A project has a cost of €16,253 with a net present value (NPV) of €423.11. The corresponding profitability index (PI) is most likely: A.) 1.42. B.) 0.03. C.) 1.03.

Missed Econ/Quant/Ethics CFA Q's

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