Missed Qs

Fixed charge coverage (FCC) ratio =

(EBIT + Lease payments)/Interest payments + Lease payments

dol =

CM/NOI

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

B B is correct because GIPS standards (0.A.9) 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).

A technical analyst observes a head and shoulders pattern in a stock she has been following. She notes the following information: Head price$83.50Shoulder price$72.00Neckline price$65.75Current price$64.00 Based on this information, her estimate of the price target is closest to: $59.50. $48.00. $44.50.

B B is correct. Price target = Neckline − (Head − Neckline). In this example, Price target = $65.75 − ($83.50 − $65.75) = $65.75 − $17.75 = $48.00.

If the number of employed and the working age population remain constant, what are the effects of a decrease in the labor force on the unemployment rate and the participation ratio? A) Both will increase. B) Both will decrease. C) One will increase and the other will decrease.

B Because the labor force is the sum of employed and unemployed, a decrease in the labor force with the number employed held constant will decrease the unemployment rate (the number of unemployed divided by the labor force). The labor force participation rate is the labor force divided by the working-age population. If the labor force decreases while the working-age population remains the same, the participation rate will decrease.

Business risk is best described as resulting from the combined effects of a firm's: A) financial risk and sales risk. B) sales risk and operating risk. C) operating risk and financial risk.

B Business risk is the combination of sales risk, which is the variability of a firm's sales, and operating risk, which is the additional variability in operating earnings (EBIT) caused by fixed operating costs.

A head and shoulders pattern is most likely to precede a reversal in trend if: A)volume decreases between the left shoulder and the head, then increases between the head and the right shoulder. B)the left shoulder, the head, and the right shoulder occur on increasing volume. C)the left shoulder, the head, and the right shoulder occur on decreasing volume.

B Decreasing volume on each of the high prices in a head and shoulders pattern (or each of the low prices in an inverse head and shoulders) suggests weakening in the supply and demand forces that were driving the price trend.

Which of the following is least likely to be considered a barrier to developing one universally recognized set of reporting standards? A) Differences of opinion among various regulatory bodies. B) Reluctance of firms to adhere to a single set of reporting standards. C) Political pressure from stakeholders affected by reporting standards.

B Firms usually support the idea of having a single set of reporting standards because having one set of standards would reduce the cost and the time spent on reporting. Disagreement among different standard-setting bodies and regulatory authorities does hamper agreement on a single set of standards, as does political pressure from business groups and others who would be affected by changes in reporting standards.

If a stock's beta is equal to 1.2, its standard deviation of returns is 28%, and the standard deviation of the returns on the market portfolio is 14%, the covariance of the stock's returns with the returns on the market portfolio is closest to: A) 0.168. B) 0.024. C) 0.600.

B From the fact that betai = Covi,mkt / Varmkt, we have Covi,mkt = betai × varmkt. Covi,mkt = 1.2 × 0.142 = 0.02352.

The number of days a particular stock increases in a given five-day period is uniformly distributed between zero and five inclusive. In a given five-day trading week, what is the probability that the stock will increase exactly three days? A)0.333. B)0.167. C)0.600.

B If the possible outcomes are X:(0,1,2,3,4,5), then the probability of each of the six outcomes is 1 / 6 = 0.167.

All else equal, which of the following is least likely to increase the interest rate risk of a bond? A) A longer maturity. B) Inclusion of a call feature. C) A decrease in the YTM.

B Inclusion of a call feature will decrease the duration of a fixed income security. The other choices increase duration.

For a binomial random variable with a 40% probability of success on each trial, the expected number of successes in 12 trials is closest to: A) 4.8. B) 5.6. C) 7.2.

A A binomial random variable has an expected value or mean equal to np. Mean = 12(0.4) = 4.8.

Adam Farman has been asked to estimate the volatility of a technology stock index. He has identified a statistic which has an expected value equal to the population volatility and has determined that increasing his sample size will decrease the sampling error for this statistic. Based only on these properties, his statistic can best be described as: A) unbiased and efficient. B) unbiased and consistent. C) efficient and consistent.

B An unbiased estimator has an expected value equal to the true value of the population parameter. A consistent estimator is more accurate the greater the sample size. An efficient estimator has the sampling distribution that is less than that of any other unbiased estimator.

Which of the following ratios will most likely result in an increase in a company's sustainable growth rate? Higher dividend payout Higher tax burden Lower interest burden

B is correct. Sustainable growth rate = Retention ratio × ROE The higher a company's return on equity (ROE) and its ability to finance itself from internally generated funds (a higher retention ratio), the greater its sustainable growth rate. In the five-factor ROE, any factor that increases ROE will increase sustainable growth: ROE = Tax burden × Interest burden × Earnings before interest and taxes margin × Asset turnover × Leverage A higher tax burden ratio (Net income/Earnings before tax) implies that the company can keep a higher percentage of pre-tax profits; this result implies a lower tax rate and a higher ROE.

Which of the following techniques is most likely to provide a company with the opportunity to inflate earnings? Reductions in the useful lives of fixed assets Last-in, first-out (LIFO) liquidation Increases to tax asset valuation allowances

B is correct. The LIFO liquidation of low-cost inventory layers results in the transfer of low inventory costs to the income statement as costs of goods sold. With reduced costs of goods sold, reported earnings are higher. C is incorrect because increases to tax asset valuation allowances are equivalent to asset write-downs, which reduce reported earnings.

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

B is correct. The debt-rating approach is used when the market prices for debt are unreliable or nonexistent.

In theory, money neutrality holds in the long run if: the money supply is positively related to the velocity of circulation of money. increases in the money supply do not influence output and employment. 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 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? Subordinate loan Third lien debt 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.

When interest rates and futures prices for an asset are uncorrelated and forwards are less liquid than futures, it is most likely that the price of a forward contract is: A)less than the price of a futures contract. B)greater than the price of a futures contract. C)equal to the price of a futures contract.

C When interest rates and futures prices are uncorrelated the prices of forward and futures on the same asset will be equal. Liquidity is not an issue as no-arbitrage prices are based on riskless hedges that are held until settlement of the derivative security.

A portfolio manager who invests in stocks with favorable ESG aspects, but preserves benchmark industry weights, is said to be engaging in: A) positive screening. B) thematic investing. C) best-in-class investing.

C With a best-in-class investing strategy, a portfolio manager selects the stocks within each industry or sector that have the most favorable ESG characteristics, without excluding any industries. Positive screening refers to a focus on positive ESG characteristics in selecting portfolio stocks, which could lead to the exclusion of some industries or sectors. Thematic investing strategies are based on a single ESG factor.

The real risk-free rate can be thought of as: A)exactly the nominal risk-free rate reduced by the expected inflation rate. B)approximately the nominal risk-free rate plus the expected inflation rate. C)approximately the nominal risk-free rate reduced by the expected inflation rate.

C he approximate relationship between nominal rates, real rates and expected inflation rates can be written as: Nominal risk-free rate = real risk-free rate + expected inflation rate. Therefore we can rewrite this equation in terms of the real risk-free rate as: Real risk-free rate = Nominal risk-free rate - expected inflation rate The exact relation is: (1 + real)(1 + expected inflation) = (1 + nominal)

The SEC's approach to addressing the significant differences in financial reporting under International Financial Reporting Standards (IFRS) and US GAAP is best described as: requiring issuers to provide disclosures describing key differences. mandating that non-US issuers provide a reconciliation to US GAAP. publicly advocating for global accounting standards and convergence.

C is correct. The SEC now advocates for global accounting standards through public announcements, such as its "Statement in Support of Convergence and Global Accounting Standards" (2010). In the past, the SEC had required reconciliations between IFRS and US GAAP, but these requirements were withdrawn in 2008. The SEC now imposes no requirements on its issuers.

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: coupon rate on a government bond with a similar time to maturity. yield to maturity on a corporate bond with similar credit risk and time to maturity. yield to maturity on a government bond with a similar time to maturity.

C is correct. The benchmark rate is the yield to maturity on a government bond with the same, or similar, time to maturity.

A company's $100 par value perpetual preferred stock has a dividend rate of 7% and a required rate of return of 11%. The company's earnings are expected to grow at a constant rate of 3% per year. If the market price per share for the preferred stock is $75, the preferred stock is most appropriately described as being: overvalued by $11.36. undervalued by $15.13. undervalued by $36.36.

Value of perpetual preferred stockValue of perpetual preferred stock = DividendRequired rate of returnDividendRequired rate of return = 70.11=$63.64.70.11=$63.64. The stock is overvalued by $75.00 − 63.64 = $11.36.

Participants in foreign exchange markets that can be characterized as "real money accounts" most likely include: A)insurance companies. B)central banks. C)hedge funds.

A Real money accounts are foreign exchange buy-side investors that do not use derivatives. Many mutual funds, pension funds, and insurance companies can be classified as real money accounts. Hedge funds typically use derivatives. Central banks usually do not act as investors in foreign exchange markets but may intervene in foreign exchange markets to achieve monetary policy objectives.

Debt-to-equity ratio

Short-term borrowings Current portion of long-term interest-bearing debt Long-term interest-bearing debt

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? Her counterparties are dealers. She will pay commissions for exchange services. 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. B is incorrect because a Japanese exporter pays no fee or commission to dealers. Dealers will profit from the bid-ask spreads. C is incorrect because in the quote-driven currency markets, currency exchange transactions take place in the over-the-counter, not organized, exchanges.

The following ten observations are a sample drawn from an approximately normal population: Value −31,−14,3,-18,34,20,−6,9,7,−16 The sample standard deviation is closest to: 17.56. 19.59. 18.58.

B

A code of ethics: A)provides the public with assurance of a minimum level of ethical behavior. B)may be rules-based or principles-based. C)should not be used for marketing purposes.

B A code of ethics may be rules-based or principles-based. There can be no assurance that none of a group or professionals will violate a code of ethics. There is no requirement that a group of professionals agreeing to a code of ethics cannot be held out to the public as a positive thing for clients.

ROE =

Tax burden × Interest burden × Earnings before interest and taxes margin × Asset turnover × Leverage

In the dominant firm model of oligopoly, it is least likely that one firm: A)effectively sets the price in the market. B)is the innovation leader in product development. C)has a significant cost advantage over its competitors.

The dominant firm model of oligopoly is based on the assumption that one firm has a significant cost advantage which allows it to set the price in the market and control a relatively large share of the industry's production and sales. It does not assume that the firm will be the innovation leader in product development. In fact, being more innovative is one of the factors that allow smaller competitors that work at a cost disadvantage to survive.

Long-run aggregate supply is least likely to be affected by changes in the: A) prices of raw materials inputs. B) quantity of labor in the economy. C) level of technology.

A Long-run aggregate supply is related to the level of technology and the available quantities of labor and capital. If the prices of productive inputs increase, short-run aggregate supply decreases (the SRAS curve shifts to the left), but long-run aggregate supply (potential real GDP) is unaffected.

Which of the following terms refer to the same type of risk? A) Total risk and the variance of returns. B) Systematic risk and firm-specific risk. C) Undiversifiable risk and unsystematic risk.

A Variance is a measure of total risk.

A multivariate distribution is best defined as describing the behavior of: A)a random variable with more than two possible outcomes. B)two or more dependent random variables. C)two or more independent random variables.

B A multivariate distribution describes the relationships between two or more random variables, when the behavior of each random variable is dependent on the others in some way.

On January 1, Jonathan Wood invests $50,000. At the end of March, his investment is worth $51,000. On April 1, Wood deposits $10,000 into his account, and by the end of June, his account is worth $60,000. Wood withdraws $30,000 on July 1 and makes no additional deposits or withdrawals the rest of the year. By the end of the year, his account is worth $33,000. The time-weighted return for the year is closest to: A)7.0%. B)10.4%. C)5.5%.

B January - March return = 51,000 / 50,000 − 1 = 2.00% April - June return = 60,000 / (51,000 + 10,000) − 1 = -1.64% July - December return = 33,000 / (60,000 − 30,000) − 1 = 10.00% Time-weighted return = [(1 + 0.02)(1 − 0.0164)(1 + 0.10)] − 1 = 0.1036 or 10.36%

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

B is correct. An investor assessing probabilities of outcomes depending on how similar they are to the current state is called representativeness.

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: income effect. wealth effect. 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).

Based on parity relations for options prices, the value of a put minus the value of a call (on the same asset with same exercise prices) must equal: A) the price of a forward contract on the asset minus the present value of the option exercise price. B) the present value of the price of a forward contract on the asset minus the option exercise price. C) the present value of the difference between the option exercise price and the price of a forward contract on the asset.

C

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: weak. strong. semi-strong.

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 there is evidence that the form of market efficiency is semi-strong (because only past market data and public information are reflected in market prices).

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

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

An investment advisor constructs a portfolio that plots on the capital market line but has less risk and a lower return than the market portfolio. This portfolio is most accurately described as: A) a lending portfolio. B) a leveraged portfolio. C) an inefficient portfolio.

A A portfolio that plots on the capital market line with less risk than the market portfolio must include a positive allocation to the risk-free asset. Such a portfolio is called a lending portfolio because investing in the risk-free asset represents lending at the risk-free rate.

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: Professional Conduct Staff and the Disciplinary Review Committee Professional Conduct Staff Disciplinary Review Committee

A 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.

A step-up coupon bond is structured such that its coupon rate increases: A) on a predetermined schedule. B) if a reference interest rate increases. C) if the issuer's credit rating decreases.

A Step-up coupon bonds feature a coupon rate that increases on a predetermined schedule. Credit linked coupon bonds have a coupon rate that changes inversely with the issuer's credit rating. Floating-rate notes have coupon rates that are based on a reference interest rate.

An investor purchased a $10,000, 5-year corporate note one year ago for $10,440. The note pays an annual coupon of $600. Over the past year, the note's annual yield-to-maturity has dropped by 1%. What total return did the investor earn over the year? A) 8.5%. B) 9.0%. C) 9.5%.

A What is a bond question doing here? CFA Institute examiners can and will insert material from other topics as they see fit. This is just a reminder to be on your guard! First, find the yield on the note at time of purchase. The appropriate calculator steps are: PV = -10,440; FV = 10,000; PMT = 600; N = 5; CPT → I/Y = 4.9842%. Next, value the note at a yield of 3.9842% with four years to maturity. FV = 10,000; PMT = 600; N = 4; I/Y = 3.9842; CPT → PV = $10,731.99. Finally, calculate the holding period return. The formula is:

The following financial data are available for a company: Return on assets (ROA)4.8% Total asset turnover1.92 Financial leverage1.75 Dividend payout ratio48.1% The company's sustainable growth rate is closest to: 4.40%. 4.78%. 4.00%.

A is correct.

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 likelyreport (in millions) a: $13.8 impairment loss on the income statement. $7.4 reduction in the balance sheet carrying amount. $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 undiscounted 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.

Average weekly initial claims for unemployment insurance is a _____________ indicator of economic activity

leading

If the OAS for a bond is higher than the Z-Spread, then the bond is

putable

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 likelyviolate the CFA Code of Ethics and Standards of Professional Conduct? No. Yes, because returns are lower than expected by the Partners. Yes, because he did not disclose the increased costs to his Partners.

A 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.

An increase in which of the following items will most likelyresult in a wider confidence interval for the population mean? Reliability factor Sample size Degrees of freedom

A 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.

Craig Boone, CFA, a fixed-income trader, observes that one of the salesmen on the desk has been allocating his trades at the end of the day, giving better execution to large clients, a practice Boone suspects is illegal. The salesman tells Boone this is a common practice and that the firm's senior management is aware of it. If Boone makes a personal record of the activity, takes it home for his personal files, and subsequently reveals it to regulatory authorities, he would: A) not be in violation of any Standards. B) be in violation of the Standards for disclosing confidential information. C) be in violation of the Standards for breaching his duty of loyalty to his employer.

A According to Standard IV(A) Loyalty, the interests of a member or candidate's employer are secondary to protecting the interests of clients and the integrity of capital markets. In this circumstance, whistleblowing is justified. As long as his motivation is clearly not for personal gain, he may, according to the Standards, violate employer confidentiality in this case. While he is required to dissociate from the suspect activity by Standard I(A) Knowledge of the Law, he is not prohibited by the Standards from reporting it unless a stricter local law applies.

Compliance with the Global Investment Performance Standards least likely requires firms to: A) include all fee-paying and non-fee-paying accounts in at least one composite. B) document in writing the policies and procedures used to comply with GIPS. C) specifically define what constitutes the firm that is claiming compliance.

A All fee-paying discretionary accounts must be included in composites, but including non-fee-paying accounts is not required. The other statements are requirements for compliance.

Compared to the standard deviation of returns on a repeat sales index for a class of real estate properties, the standard deviation of returns on an appraisal index for the same class of properties is most likely to be: A) lower. B) higher. C) the same.

A Appraisal index returns are based on estimates of property values and therefore tend to be smoother than repeat sales index returns, which are based on actual sale prices of properties. As a result, appraisal index returns have lower standard deviations.

Ralph Malone, CFA, has many clients, including a trust account that benefits three of his immediate family members. His firm changes its recommendation on a stock from "hold" to "buy" on a security that is suitable for many clients, including the trust. Which of the following would be considered a violation of the Standard concerning priority of transactions? A) Malone waits until after the firm purchases the security to buy it for the family trust account. B) Malone trades on the family account shortly after his firm's clients have been informed of the buy recommendation. C) The firm gives clients time to act on the new recommendation and then buys 100,000 shares for its own account prior to publicly disclosing the new recommendation.

A Because the family account is a client account, it should be treated as any other client account would be. Waiting until after the firm buys shares would violate Standard VI(B) Priority of Transactions. There is no requirement that a firm's recommendations be made public.

Roger Smith, CFA, has been invited to join a group of analysts in touring the riverboats of River Casino Corp. For the tour, River Casino has arranged chartered flights from casino to casino since commercial flight schedules are not practical for the group's time schedule. River Casino has also arranged to pay for the analysts' lodging for the three nights of the tour. According to CFA Institute Standards of Professional Conduct, Smith: A) may accept the arrangements as they are. B) may accept the flight but is required to pay for his lodging. C) is required to pay for his flight and lodging.

A Because the itinerary required charter flights due to a lack of commercial transportation, River Casino can appropriately provide them. While Standard I(B) Independence and Objectivity recommends that members pay their own room costs, it is not required and it is not unusual for members to accept accommodations.

Mei Tekei just celebrated her 22nd birthday. When she is 27, she will receive a $100,000 inheritance. Tekei needs funds for the down payment on a co-op in Manhattan and has found a bank that will give her the present value of her inheritance amount, assuming an 8.0% stated annual interest rate with continuous compounding. Will the proceeds from the bank be sufficient to cover her down payment of $65,000? A)Yes, Tekei will receive $68,058. B)No, Tekei will only receive $61,878. C)Yes, Tekei will receive $67,028.

A Because the rate is 8% compounded continuously, the effective annual rate is e0.08 - 1 = 8.33%. To find the present value of the inheritance, enter N=5, I/Y=8.33, PMT=0, FV=100,000 CPT PV = 67,028. Alternatively, 100,000e-0.08(5) = 67,032.

he price of a forward contract: A) is stated in the contract. B) equals zero at contract initiation. C) may fluctuate during the contract's life.

A The price of a forward contract is the price at which the underlying asset will be exchanged at settlement. This price is stated in the contract and determined such that the value of the contract is equal to zero at initiation. The value may vary during the life of the contract but the price does not.

Byron Bell, CFA, tells his assistant that Mary Mitchel, a client of his, confided to him that she is suffering from the early stages of Alzheimer's disease and that she is planning to leave almost all of her sizable estate to Prather House, a support facility for Alzheimer's patients. Bell directs his assistant to keep this information confidential. With respect to the Standard on preservation of confidentiality, Bell has: A) not violated the Standard. B) violated the Standard by sharing information about his client's health but not about planned bequest to Prather House. C) violated the Standard both by sharing the information about his client's health and about her planned bequest to Prather House.

A Bell is permitted to share confidential client information with another firm employee who is also working for the client's benefit, so sharing this information with his assistant is not a violation of Standard III(E) Preservation of Confidentiality.

Lynn Black, CFA, is an analyst with the underwriter for an upcoming issue of Mtex Software debentures. Black learns from an employee in Mtex's programming department that there is a serious problem with Mtex's newest software program and that many customers have canceled their orders with Mtex. There is no mention of these problems in the prospectus for the debentures, which has been circulated. According to the CFA Institute Standards of Professional Conduct, Black's best course of action is to: A) inform her supervisor of her discovery. B) take no action because this is material nonpublic information. C) notify potential investors of the omission on a fair and equitable basis.

A Black is in possession of material nonpublic information, and her most appropriate course of action is to inform her supervisor (or the firm's compliance officer) of what she has learned. She may not simply share the information with prospective buyers; if her firm determines that the information affects the value of the debentures, they must revise and recirculate the prospectus. Failing to do so may violate Standard I(C) Misrepresentation. Not informing her employer may be detrimental to her firm's interests and reputation if proceeding with the new issue without disclosure would violate regulations or laws.

Donald Smith, CFA, has been assigned by his employer to write a report for clients on Braden Corporation. Smith has 1,000 shares of Braden that he bought three years ago and has been discussing a consulting contract with Braden to write guidelines for their investor relations department. If Smith writes the report on Braden Corporation, he must disclose within the report: A) both his ownership of Braden shares and his prospective consulting work. B) and to his employer his prospective consulting work but not his ownership of Braden shares. C) his ownership of Braden shares but need only disclose his prospective consulting work to his employer.

A Both ownership of Braden stock and the possible consulting work present potential conflicts of interest for Smith and must be disclosed within the report to comply with Standard VI(A) Disclosure of Conflicts.

Other things equal, a decrease in the value of a put option on a stock is most likely consistent with which of the following changes in the risk- free rate and stock return volatility? Risk-free rate-Volatility A) Increase-Decrease B) Decrease-Increase C) Decrease-Decrease

A Decreasing volatility of returns on the underlying stock will decrease option values for both puts and calls. An increase in the risk-free rate increases the values of call options on equities and decreases the values of put options on equities.

The joint probability function for returns on an equity index (RI) and returns on a stock (RS)is given in the following table: Returns on Index (RI)Return on stock (RS)RI = 0.16RI = 0.02RI = −0.10RS = 0.240.250.000.00RS = 0.030.000.450.00RS = −0.150.000.000.30 Covariance between stock returns and index returns is closest to: A)0.014. B)0.019. C)0.029.

A E(I) = (0.25 × 0.16) + (0.45 × 0.02) + (0.30 × -0.10) = 0.0190. E(S) = (0.25 × 0.24) + (0.45 × 0.03) + (0.30 × -0.15) = 0.0285. Covariance = [0.25 × (0.16 - 0.0190) × (0.24 - 0.0285)] + [0.45 × (0.02 - 0.0190) × (0.03 - 0.0285)] + [0.30 × (-0.10 - 0.0190) × (-0.15 - 0.0285)] = 0.0138.

Changes in a fixed-coupon bond's cash flows that result from changes in yield would be reflected in the bond's: A) effective duration. B) modified duration. C) Macaulay duration.

A Effective duration and effective convexity capture the effects from changes in a bond's cash flows when the yield changes (e.g., an increase in the likelihood of a bond being called when its yield has decreased). For this reason, they are the appropriate measures of interest rate sensitivity for bonds with embedded options.

If the probability of event J multiplied by the probability of event K is not equal to the joint probability of events J and K, then events J and K are most likely: A) dependent events. B) independent events. C) mutually exclusive events.

A Events J and K are dependent. By the multiplication rule, joint probability P(JK) = P(J|K) × P(K), or P(JK) = P(K|J) × P(J). Events are independent if P(J|K) = P(J) and P(K|J) = P(K). This implies that for independent events, P(JK) = P(J) × P(K). If this condition is not met, events J and K are dependent. If events J and K are mutually exclusive, their joint probability is zero. The information given is consistent with this but not sufficient to conclude that this is the case.

AlcoBanc owns a piece of property that is under consideration for a new bank branch. Which of the following is least likely a relevant incremental cash flow in analyzing a capital budgeting project? The: A) interest costs of a loan for the property purchase. B) business gained at other branches due to new customers at the proposed site. C) $150,000 AlcoBanc could get if they sold the property instead of building a new branch.

A Financing costs should not be included in incremental cash flows. They are reflected in the weighted average cost of capital (WACC). New business at other branches is a positive externality and the $150,000 to sell the property is an opportunity cost.

Which of the following statements about parametric and nonparametric tests is least accurate? A)Nonparametric tests are often used in conjunction with parametric tests. B)Nonparametric tests have fewer assumptions than parametric tests. C)Parametric tests are most appropriate when a population is heavily skewed.

A For a distribution that is non-normally distributed, a nonparametric test may be most appropriate. A nonparametric test tends to make minimal assumptions about the population, while parametric tests rely on assumptions regarding the distribution of the population. Both kinds of tests are often used in conjunction with one another.

McDermott Company routinely takes advantage of trade discounts on terms of 2/15 net 90. The cost of short-term borrowing for McDermott is 10.2%. If McDermott begins forgoing trade discounts and paying invoices on their due dates, this would most likely: A) increase its cost of short-term funding. B) improve its business relationships with its suppliers. C) be viewed by analysts as efficient accounts payable management.

A Forgoing the discount can be viewed as borrowing funds from suppliers for 90 - 15 = 75 days. Given trade credit terms of 2/15 net 90, the annualized cost of this funding is: (1+(.02/(1-.02)))^(365/75) - 1 = 10.33% Because this source of financing is more costly than the company's other sources of short-term funding (10.2%), using it would not be viewed as efficient accounts payable management. Paying later is unlikely to improve its business relationship with its suppliers, although it will not necessarily have a negative impact

An analyst determines that a portfolio with a 35% weight in Investment P and a 65% weight in Investment Q will have a standard deviation of returns equal to zero. Investment P has an expected return of 8%. Investment Q has a standard deviation of returns of 7.1% and a covariance with the market of 0.0029. The risk-free rate is 5% and the market risk premium is 7%. If no arbitrage opportunities are available, the expected rate of return on the combined portfolio is closest to: A)5%. B)7%. C)6%.

A If the no-arbitrage condition is met, a riskless portfolio (a portfolio with zero standard deviation of returns) will yield the risk-free rate of return.

According to the Standard concerning suitability, it is most likely that members and candidates in advisory relationships with clients should: A) document unsuccessful attempts to update client information. B) purchase only securities with low to medium risk for a client with moderate risk tolerance. C) decline to manage assets for clients who withhold important information about their financial circumstances and needs.

A Members and candidates who are in advisory relationships with clients should document unsuccessful attempts to update client information and circumstances. Because risk is to be evaluated in a portfolio context, there is no prohibition against the purchase of a security that is risky on a stand-alone basis, as long as the risk of the client's overall portfolio is consistent with their ability and willingness to assume investment risk. While lack of client information could make suitability a difficult question, Standard III(C) Suitability does not prohibit managing assets for clients who withhold information about their financial circumstances and needs.

Susan Smart, CFA, is about to change her "buy" recommendation on RollinsCo to "sell." RollinsCo had been growing rapidly over the past year, but Smart believes the growth potential is now gone. Smart sells the shares held in her discretionary client accounts and in her own personal account before issuing her report. According to the Standards that concern fair dealing and priority of transactions, Smart violated: A) both of these Standards. B) neither of these Standards. C) only one of these Standards.

A Smart violated both Standards. Smart violated Standard III(B) Fair Dealing because she did not deal fairly and objectively with all clients and prospects when disseminating investment recommendations, giving priority to some of the firm's clients by trading for her clients first before issuing the report. She also sold her own shares before issuing the report, which violated Standard VI(B) Priority of Transactions. Smart did not give clients an opportunity to react to and benefit from her recommendation before she personally benefited from her research.

Diane Harris, a CFA Institute member, is a portfolio manager for Worldwide Investments. One of her clients has offered her the use of his condominium in Hawaii if the returns on his U.S. equities account beat their benchmark on a risk-adjusted basis. Harris informed her manager of all terms of this agreement in writing and received verbal consent to the arrangement before accepting the offer. Did Harris violate the Standards? A) Yes, because written consent from her employer is required. B) No, because bonuses from clients for doing her job well do not create a conflict of interest. C) No, because Harris notified and received verbal consent from her employer to enter the arrangement.

A Standard IV(B) Additional Compensation Arrangements requires that members and candidates obtain written consent from their employers to enter into the agreement for additional contingent compensation from a client. Harris only received verbal consent. The concern is that such an arrangement might induce Harris to give partiality to this client's portfolio over those of her other clients.

Alan Barnes, CFA, is interested in the expected quarterly return on FTSE 100 stock index. He has data for the last five years and calculates the average return on the index over the last 20 quarters. This average return: A) is different from the parameter he is trying to estimate by the amount of the sampling error. B) overstates the return because he should divide by the square root of 20 when using a mean value. C) overstates the expected return because he should have used the geometric mean and not the simple average.

A The 20 quarters he has used are a sample of all the possible outcomes for the quarterly returns on the index. The difference between the true population parameter (mean index return) he is trying to estimate and the sample statistic he has calculated is called the sampling error. The arithmetic mean is the appropriate estimator of the next period's return.

Supplying capital to companies that are just moving into operation, but do not as yet have a product or service available to sell, is a description that best relates to which of the following stages of venture capital investing? A) Early stage. B) Mezzanine stage. C) Angel investing stage.

A The description relates best to the early stage wherein the capital that is supplied helps speed up product development and also helps pay for the beginning of a marketing campaign.

With respect to firms in the financial services industry, a conflict between the interests of shareholders and regulators is best illustrated by a shareholder preference for: A) a decrease in the firm's equity capital. B) a decrease in the firm's equity multiplier. C) an increase in the value of a firm's equity.

A The shareholders of a regulated firm in the financial services industry may prefer to maintain less equity capital to support their business to increase the return on equity, while regulators may impose higher equity capital requirements to protect the economic system in cases of financial distress. Regulators are not typically concerned with increasing equity values but rather with a firm's accounting equity. A decrease in the equity multiplier (financial leverage ratio, or assets/equity) will result from an increase in a firm's equity capital.

`Which of the following statements regarding the significance level of a hypothesis test is most accurate? A) Given a significance level of 5%, a test will reject a true null hypothesis 5% of the time. B) If the significance level of a test is 5%, it will yield the correct decision about the null hypothesis 95% of the time. C) If the significance level of a test is 95%, it will yield the correct decision about the null hypothesis 95% of the time.

A The significance level of a test is the probability that a true null hypothesis will be rejected by chance because the test statistic is from a sample and may take on a value that is outside the range of critical values because of sampling error. Choice B is incorrect because the probability of making a correct decision also must account for the probability of failing to reject a false null hypothesis.

A technical analyst is most likely to expect an uptrend in prices to continue if: A) converging trendlines form a triangle pattern on a price chart. B) the 14-day relative strength index increases from 70 to 80. C) the uptrend line acts as a resistance level when the price approaches it.

A Triangles are thought to be continuation patterns, suggesting that the trend will continue in the same direction it was going when the triangle pattern formed. An RSI above 70 is thought to indicate an overbought condition, which can be a warning sign that the current uptrend is not sustainable. An uptrend line should act as a support level in an uptrend when the price approaches the trendline from above. If an uptrend line acts as a resistance level, the price must have broken down through the trendline, which is a sign that the uptrend may be ending.

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

A Under IFRS, inventory values are revalued upward only to the extent they were previously written down. In this case, that is from €25,000 back up to the original value of €28,000. The increase is reported as gain for the period.

To ensure the continuity of a value-weighted index when one of the stocks in the index is split: A) no adjustment is necessary. B) only the denominator must be adjusted for the split. C) both the numerator and the denominator must be adjusted for the split.

A Value-weighted indexes do not need to be adjusted for stock splits because the market capitalization of the company remains the same.

A multi-market index is most likely to overweight countries that have recently experienced high equity market returns if it weights the securities in each country index by: A) dividend yield, and weights the country index returns by market capitalization. B) dividend yield, and weights the country index returns by gross domestic product. C) market capitalization, and weights the country index returns by gross domestic product.

A Weighting countries in a multi-market index by market capitalization, rather than a fundamental factor such as GDP, is likely to overweight countries with previously high stock returns.

The following information is available for a company's bank account: Total deposits (millions)$16.0Average daily float (millions)$2.5Number of days15 The float factor for the company is closest to: 2.3. 6.4. 0.4.

A is correct. Float factor = Average daily float/Average daily deposit

The statement that is most consistent with real business cycle (RBC) models is that: persons are unemployed because their asking wages are too high. governments should intervene when the economy is in contraction. 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. B is incorrect because RBC models of the business cycle conclude that expansions and contractions represent efficient operation of the economy in response to external real shocks. Because the level of economic activity at any time is consistent with maximizing expected utility, the policy recommendation of RBC theory is for government not to intervene in the economy with discretionary fiscal and monetary policy. Cycles have real causes, such as changes in technology, whereas monetary variables, such as inflation, are assumed to have no effect on GDP and unemployment.

A key difference between a wrap account and a mutual fund is that wrap accounts: have assets that are owned directly by the individual. cannot be tailored to the tax needs of a client. have a lower required minimum investment.

A is correct. The key difference between a wrap account and a mutual fund is that in a wrap account, the assets are owned directly by the individual.

Which of the following statements is most accurate? Putable common shares provide benefits to both the issuing company and investors. Convertible preference shares are more volatile and riskier than the underlying common shares. Investors owning a small number of common shares would prefer statutory voting to cumulative voting.

A is correct. The put option feature facilitates raising capital because the shares are more appealing to investors. As such, it provides a benefit to the issuing company. It also helps investors limit their potential losses because they can sell the shares back to the issuing company if the market price falls below the pre-specified put price. Therefore, putable common shares are beneficial to both the issuing company and the investors.

Other things equal, a real exchange rate (stated as units of domestic currency per unit of foreign currency) will decrease as a result of an increase in the: A)nominal exchange rate (domestic/foreign). B)domestic price level. C)foreign price level.

B An increase in the domestic price level, other things equal, will decrease a real exchange rate. Increases in the nominal exchange rate or the foreign price level, other things equal, will increase a real exchange rate.

Which of the following statements about a confidence interval for a population mean is most accurate? A)If the population variance is unknown, a large sample size is required in order to estimate a confidence interval for the population mean. B)For a sample size of 30, using a t-statistic will result in a wider confidence interval for a population mean than using a z-statistic. C)When a z-statistic is acceptable, a 95% confidence interval for a population mean is the sample mean plus-or-minus 1.96 times the sample standard deviation.

Although the t-distribution begins to approach the shape of a normal distribution for large sample sizes, at a sample size of 30 a t-statistic produces a wider confidence interval than a z-statistic. A confidence interval for the population mean is the sample mean plus-or-minus the appropriate critical value times the standard error, which is the standard deviation divided by the square root of the sample size. If a population is normally distributed, we can use a t-statistic to construct a confidence interval for the population mean from a small sample, even if the population variance is unknown.

Using historical index returns for an equities market over a 20-year period, an analyst has calculated the average annual return as 5.60% and the holding period return as 170%. The compound annual index return over the period is closest to: A) 2.69%. B) 5.09%. C) 5.24%.

B (1+1.7)^(1/20)-1

An analyst who is a CFA Institute member receives an invitation from a business associate's firm to spend the weekend in a high-quality resort. In order to abide by the Standards, the analyst should (may): A)refuse the invitation if the associate is from a firm he analyzes for his employer. B)do both of the actions listed here. C)obtain written consent from his supervisor if the offer is contingent on achieving a target investment return.

B According to Standard I(B) Independence and Objectivity, the analyst should refuse the invitation if it is from a firm the analyst covers for his employer. The analyst can accept the invitation if it is from a client but the analyst must get written consent from his employer if the offer is contingent on future performance, to comply with Standard IV(B) Additional Compensation Arrangements.

Which of the following are recommended procedures of compliance according to Standard I(D), Misconduct? A)Enroll employees in a continuing education program that would provide updates on required ethical behavior. B)Conduct background checks on potential employees to ensure that they are of good character. C)Refer to the Professional Conduct Program for arbitration of disputes with other members or candidates.

B According to Standard I(D) Misconduct - Procedures for Compliance: Members should encourage their employers to conduct background checks on potential employees to ensure that they are of good character and eligible to work in the investment industry.

Which of the following statements about alternative investment indexes is most accurate? A) An investor can replicate a commodity index by making direct investments in the underlying physical commodities. B) Real Estate Investment Trust indexes track the prices of shares of publicly traded companies that invest in mortgages or real property. C) Hedge fund indexes accurately represent the investment performance of the hedge fund industry.

B REIT indexes represent a convenient way to invest in real estate. Commodity indexes are based on futures prices of commodities, and are not replicated by investing in the commodities themselves. Hedge fund indexes are biased upward because hedge funds are not required to disclose their performance to index providers and poorly performing funds are less likely to do so (self-selection bias).

Which of the following is a risk faced by issuers of commercial paper? A) Default risk. B) Rollover risk. C) Reinvestment risk.

B Rollover risk is the risk that an issuer who relies on the commercial paper market as a funding source may not be able to issue new commercial paper when an outstanding issue matures. Default risk and reinvestment risk are faced by bondholders.

Adam Schute, CFA, is on a conference call with the CFO of an investment banking client with his phone speaker on and his door open. As a result, salesmen and traders overhear the CFO describing problems with production target dates that have not been publicly disclosed. The salesmen relay this information to clients and the traders reduce their positions in the stock. With respect to the Standard on material nonpublic information, Schute has: A) not violated the Standard because he has not acted on the information, but the traders and salesmen have violated the Standard. B) violated the Standard because he should have taken steps to prevent the dissemination of the information. C) violated the Standard by not making the information public when he realized others had overheard the call.

B Schute has violated the Standard by not taking steps to ensure that the nonpublic information he has received as part of his investment banking work was not shared with others in the firm.

William Rogers, CFA, is a commercial insurance broker who sometimes recommends money managers to his high net worth clients. For those clients who hire the managers, the managers pay Rogers a percentage of the management fees on the account. Rogers tells prospects, "I receive referral fees from the money managers if you employ them." Rogers has: A) not violated the Standards. B) violated the Standard concerning referrals. C) violated the Standard on communications with clients and prospects.

B Standard VI(C) Referral Fees requires members and candidates to disclose any referral fees they will earn from successful referrals as well as the nature of the compensation. Here Rogers must disclose that he will receive a percentage of management fees on an ongoing basis.

Which of the following statements about revenue recognition methods is most accurate? A) The completed contract method under U.S. GAAP recognizes long-term contract revenue only as each phase of production is complete. B) The percentage of completion method recognizes profit corresponding to the costs incurred as a proportion of estimated total costs. C) The installment method recognizes sales when cash is received, but no profit is recognized until cash collected exceeds costs.

B The description of the percentage-of-completion method is accurate. The completed contract method under U.S. GAAP recognizes revenue only when the entire project is complete. The installment method recognizes profit in proportion to cash collected.

Which of the following pairs of general categories are least likely to be considered in the formulas used by credit rating agencies to determine the capacity of a borrower to repay a debt? A) Operational efficiency; leverage. B) Margin stability; availability of collateral. C) Leverage; scale and diversification.

B The four general categories are: (1) scale and diversification, (2) operational efficiency, (3) margin stability, and (4) leverage. Larger companies and those with more different product lines and greater geographic diversification are better credit risks. High operating efficiency is indicative of a better credit risk. Stable profit margins indicate a higher probability of repayment and thus, a better credit risk. Firms with greater earnings in relation to their debt level are better credit risks. While the availability of collateral certainly reduces lender risk, it is not one of the general categories used by credit rating agencies to determine capacity to repay. Specifically, they would consider (1) several specific accounting ratios and (2) business characteristics. The availability of collateral falls into neither category.

An analyst with Guffman Investments has developed a stock selection model based on earnings announcements made by companies with high P/E stocks. The model predicts that investing in companies with P/E ratios twice that of their industry average that make positive earnings announcements will generate significant excess return. If the analyst has consistently made superior risk-adjusted returns using this strategy, which form of the efficient market hypothesis has been violated? A) Weak form only. B) Semistrong and strong forms only. C) Strong, semistrong, and weak forms.

B The semistrong form of EMH states that security prices rapidly adjust to reflect all publicly available information. If the analyst can use his model, which is based on publicly available information, to earn above average returns, the semistrong form of the EMH has been violated. If the semistrong form of EMH is violated, the strong form of EMH is also violated.

The short-run supply curve for a firm under perfect competition is the firm's: A) marginal cost curve above average total cost. B) marginal cost curve above average variable cost. C) average variable cost curve above marginal revenue.

B The supply curve for a firm under perfect competition is its marginal cost curve above average variable cost. As long as price exceeds AVC, the firm will produce up to the quantity where MC = Price, which is also MR in this case.

In which step of the portfolio management process does an investment manager rebalance the portfolio to its target asset allocation percentages? A) Analysis step. B) Feedback step. C) Execution step.

B The three major steps in the portfolio management process are planning, execution, and feedback. Rebalancing the portfolio to its desired asset allocation is part of the feedback step.

An example of risk transfer combined with self-insurance is most likely: a bond portfolio hedged with an interest rate option. an insurance policy with a deductible. a bank that establishes a loan loss reserve fund.

B is correct. Risk transfer is accomplished through an insurance policy. A deductible in an insurance policy means the insured is bearing some of the risk of loss and thereby (partially) self-insuring. Hedging with derivatives accomplishes risk shifting, not risk transfer. A bank loan loss reserve is a form of self-insurance combined with diversification, but it does not include risk transfer.

A researcher has investigated the returns over the last five years to a long-short strategy based on mean reversion in equity returns volatility. His hypothesis test led to rejection of the hypothesis that abnormal (risk-adjusted) returns to the strategy over the period were less than or equal to zero at the 1% level of significance. He would most appropriately decide that: A) his firm should employ the strategy for client accounts because the abnormal returns are positive and statistically significant. B) while the abnormal returns are highly significant statistically, they may not be economically meaningful. C) as long as the estimated statistical returns are greater than the transactions costs of the strategy, his firm should employ the strategy for client accounts.

B There are many reasons that a statistically significant result may not be economically significant (meaningful). Besides transactions costs, we must consider the risk of the strategy as well. For example, although the mean abnormal return to the strategy over the 5-year sample period is greater than transactions costs, abnormal returns for various sub-periods may be highly variable. In this case the risk of the strategy return from month to month or quarter to quarter may be too great to make employing the strategy in client accounts economically attractive.

Samuel Parkin, a principal of Argora Advisers, is in charge of preparing the firm's performance history in accordance with GIPS. At the end of each year, he assigns each portfolio to a single composite based on its holdings over the year. He uses the mean annual total return of portfolios assigned to a composite as the composite's return. With respect to GIPS compliance: A) both of these actions comply with GIPS. B) neither of these actions comply with GIPS. C) only one of these actions complies with GIPS.

B To comply with GIPS, portfolios must be assigned to composites before the returns are known; assigning them at the end of the year is not acceptable. The composite return must be asset weighted not a simple average (equal-weighted). Asset weighting will ensure that the performance reported will be representative of (if not exactly equal to) the performance of all the accounts assigned to a single composite over the reporting period.

An analyst finds a stock that has had a low beta given its historical return, but its total risk has been commensurate with its return. When writing a research report about the stock for clients with well-diversified portfolios, according to Standard V(B), Communication with Clients and Prospective Clients, the analyst needs to mention: A)both the historical beta and total risk and return. B)the relationship of the historical beta and return only. C)the relationship of the historical total risk to return only.

B Using reasonable judgment, an analyst may exclude certain factors from research reports. Since the report will be delivered to clients with well-diversified portfolios, total risk is not as important as beta. Given that the total risk has been only commensurate with historical return, furthermore, then the analyst is not negligent by not mentioning it.

John purchased 60% of the stocks in a portfolio, while Andrew purchased the other 40%. Half of John's stock-picks are considered good, while a fourth of Andrew's are considered to be good. If a randomly chosen stock is a good one, what is the probability John selected it? A)0.40. B)0.75. C)0.30

B Using the information of the stock being good, the probability is updated to a conditional probability: P(John | good) = P(good and John) / P(good). P(good and John) = P(good | John) × P(John) = 0.5 × 0.6 = 0.3. P(good and Andrew) = 0.25 × 0.40 = 0.10. P(good) = P(good and John) + P (good and Andrew) = 0.40. P(John | good) = P(good and John) / P(good) = 0.3 / 0.4 = 0.75.

An asset has an annual return of 19.9%, standard deviation of returns of 18.5%, and correlation with the market of 0.9. If the standard deviation of returns on the market is 15.9% and the risk-free rate is 1%, the beta of this asset is closest to: 1.02. 1.05. 1.16

B is correct. ββ = (ρi,mσi)σm(ρi,mσi)σm = (0.90×0.185)0.159(0.90×0.185)0.159 = 1.047

A least likely reason for investors to include commodity derivatives in their investment portfolios is: commodity-related stocks' positive correlation with the overall equity market. it eliminates the need to understand the physical supply chain and general supply-demand dynamics of a commodity. the tendency for commodity prices to be positively correlated with inflation.

B is correct. Because the prices of commodity derivatives are, to a significant extent, a function of the underlying commodity prices, it is important to understand the physical supply chain and general supply-demand dynamics of a commodity. A is incorrect because commodity-related stocks tend to exhibit a high degree of correlation with the overall equity market. High correlation means low diversification benefits, which reduces the appeal of including this type of investment in a portfolio so investors may be drawn to commodity derivatives that have a lower correlation with the overall equity market.

Business risk most likely incorporates operating risk and: financial risk. sales risk. interest rate risk.

B is correct. Business risk is the combination of sales risk and operating risk.

Convenience yield is best described as a nonmonetary benefit of holding a(n): option contract. asset. forward contract.

B is correct. Convenience yield represents the nonmonetary advantage of holding the asset.

Which of the following conditions is most likely to facilitate shareholder activism? Cross-shareholdings Cumulative voting Staggered boards

B is correct. Cumulative voting facilitates shareholder activism by allowing shareholders to accumulate and vote all their shares for a single candidate in an election involving more than one candidate. Minority shareholders, who may be activist shareholders, are more likely to successfully elect a board member in this way.

After the public announcement of the merger of two firms, an investor makes abnormal returns by going long on the target firm and short on the acquiring firm. This most likely violates which form of market efficiency? Semi-strong-form only Semi-strong-form and strong-form Weak-form and semi-strong-form

B is correct. In a semi-strong-form efficient market, prices adjust quickly and accurately to new information. In this case, prices would quickly adjust to the merger announcement, and if the market is a semi-strong-form efficient market, investors acting after the merger announcement would not be able to earn abnormal returns. Therefore, the market is not semi-strong-form efficient. A market that is not semi-strong-form efficient is also not strong-form efficient. Thus, violating the semi-strong-form efficiency also implies violating the strong-form efficiency. However, the market could still be weak-form efficient because past prices are not being used to make abnormal profits. Thus, we cannot say that the weak-form market efficiency has been violated.

Which statement best describes the risk to senior tranche investors in a collateralized debt obligation (CDO)? There are no triggers that require the payoff of the principal to investors. In default, the manager will not earn a return sufficient to payoff investors. Leverage inherent in the CDO transaction results in higher risk.

B is correct. In the case of defaults in collateral, there is a risk that the CDO manager will not earn a sufficient return to pay off the investors in the senior and mezzanine tranches. This will result in losses to these classes of bondholders

Which of the following statements concerning the use of industry analysis is most accurate? Industry analysis is most useful for: sector allocations in passive equity portfolios. portfolio performance attribution. evaluating market efficiency.

B is correct. Portfolio performance attribution, which addresses the sources of a portfolio's returns, usually in relation to the portfolio's benchmark, includes industry or sector selection. Industry classification schemes play a role in such performance attribution.

In a transaction referred to as a management buyout (MBO): A) management sells its shares to an investor group attempting to gain control of a company. B) management buys a controlling interest in a public company to gain control of the board of directors. C) an investor group that includes management buys all the shares of a company and they no longer trade on an exchange

C Management buyout refers to a situation where an investor group that includes the firm's key management purchases all the outstanding shares (not just a controlling interest) of a public company in order to take it private. Once this is done, the shares are no longer registered for public trading and, as a result, are no longer traded on exchanges or in other public markets.

Find the future value of the following uneven cash flow stream. Assume end of the year payments. The discount rate is 12%. Year 1-2,000Year 2-3,000Year 36,000Year 425,000Year 530,000 A)$65,144.33. B)$33,004.15. C)$58,164.58.

C N = 4; I/Y = 12; PMT = 0; PV = -2,000; CPT → FV = -3,147.04 N = 3; I/Y = 12; PMT = 0; PV = -3,000; CPT → FV = -4,214.78 N = 2; I/Y = 12; PMT = 0; PV = 6,000; CPT → FV = 7,526.40 N = 1; I/Y = 12; PMT = 0; PV = 25,000; CPT → FV = 28,000.00 N = 0; I/Y = 12; PMT = 0; PV = 30,000; CPT → FV = 30,000.00 Sum the cash flows: $58,164.58. Alternative calculation solution: -2,000 × 1.124 - 3,000 × 1.123 + 6,000 × 1.122 + 25,000 × 1.12 + 30,000 = $58,164.58.

Cynthia Abbott, a CFA charterholder, is preparing a research report on Boswell Company for her employer, Capital Asset Management. Bob Carter, president of Boswell, invites Abbott and several other analysts to visit his company and offers to pay her transportation and lodging. Abbott pays for her own transportation and lodging, but while visiting the company, accepts an item of small value from Carter. Abbott does not disclose this gift to her supervisor at Capital when she returns. In the course of the company visit, Abbott overhears a conversation between Carter and his chief financial officer that the company's earnings per share (EPS) are expected to be $1.10 for the next quarter. Abbott was surprised that this EPS is substantially above her initial earnings estimate of $0.70 per share. Without further investigation, Abbott decides to include the $1.10 EPS in her research report on Boswell. Using the high EPS positively affects her recommendation of Boswell. Which of the following statements about whether Abbott violated Standard V(A), Diligence and Reasonable Basis and Standard I(B), Independence and Objectivity is CORRECT? Abbott: A)did not violate Standard V(A) but she violated Standard I(B). B)violated both Standard V(A) and Standard I(B). C)violated Standard V(A) but she did not violate Standard I(B).

C Abbott violated Standard V(A), Diligence and Reasonable Basis, because she did not have a reasonable and adequate basis to support the $1.10 EPS without further investigation. By including the $1.10 EPS in her report, she did not exercise diligence and thoroughness to ensure that any research report finding is accurate. If Abbott suspects that any information in a source is not accurate, she should refrain from relying on that information. Abbott did not violate Standard I(B), Independence and Objectivity, because the gift from Carter would not reasonably be expected to compromise her independent judgment.

Which of the following is least accurate with regard to advertising for firms operating under monopolistic competition? A)Advertising may decrease average total cost. B)Advertising expenses are high relative to perfect competition and monopoly. C)The increase to average total costs associated with advertising increases as output increases.

C Advertising expenses are high for firms in monopolistic competition. Not only because firms need to inform consumers about the unique features of a firm's products, but also to create or increase a perception of differences between products that are actually quite similar. Advertising costs increase average total costs, but the increase to average total cost attributable to advertising decreases as output increases because more fixed advertising dollars are being averaged over a larger quantity. If advertising increases output (sales) significantly, it can actually decrease a firm's average total cost if there are economies of scale.

If money wages increase, other things equal, the most likely result is a: A)short-run inflationary gap. B)long-run inflationary gap. C)short-run recessionary gap.

C An increase in the wage rate decreases short-run aggregate supply, leading to a short-run recessionary gap.

Two Level I CFA candidates are discussing futures and make the following statements: Candidate 1:Futures are traded using standardized contracts. They require margin and incur interest charges on the margin loan.Candidate 2:If the margin balance falls below the maintenance margin amount due to a change in the contract price for the underlying assets, the investor must add funds to bring the margin back up to the initial margin requirement. Are the candidates' statements correct or incorrect? A) Both statements are correct. B) Neither statement is correct. C) Only one of the statements is correct.

C Candidate 1 is incorrect. In the futures markets, margin is a performance guarantee. It is money deposited by both the long and the short. There is no loan involved (contrasting with margin in the equity markets) and thus no interest charges. Candidate 2 is correct.

Member compliance on issues relating to corporate governance or to soft dollars is primarily addressed by the Standard concerning: A)Disclosure of Referral Fees. B)Disclosure of Conflicts to Clients and Prospects. C)Loyalty, Prudence, and Care.

C Fiduciary duty on issues relating to corporate governance or to soft dollars is primarily addressed by Standard III(A), Loyalty, Prudence, and Care.

Sanctions that may be imposed on members by CFA Institute include: A) public censure, suspension of membership, and fines. B) suspension of membership, revocation of CFA charter, and fines. C) public censure, suspension of membership, and revocation of CFA charter.

C If a Professional Conduct Program inquiry finds that a member has violated the Code and Standards, CFA Institute may impose sanctions, which include public censure, suspension of membership in CFA Institute and use of the CFA designation, and revocation of a member's CFA charter. CFA Institute does not impose fines.

The process that ensures that two securities positions with identical future payoffs, regardless of future events, will have the same price is called: A)arbitrage. B)exchange parity. C)the law of one price.

C If two securities have identical payoffs regardless of events, the process of arbitrage will move prices toward equality. Arbitrageurs will buy the lower priced position and sell the higher priced position, for an immediate profit without any future liability. The law of one price (for securities with identical payoffs) is not a process; it is 'enforced' by arbitrage.

Harding Corp. has a permanently impaired asset. The difference between its carrying value and the present value of its expected cash flows should be written down immediately and: A) reported as an operating loss. B) charged directly against retained earnings. C) reported as a non-operating loss in other comprehensive income.

C Impairment writedowns are reported losses "above the line" and are included in income from continuing operations.

Akor is a country that has chosen to use a conventional fixed peg arrangement as the country's exchange rate regime. Under this arrangement, Akor's exchange rate against the currency to which it pegs: A) is market-determined. B) will be equal to the peg rate. C) may fluctuate around the peg rate.

C In a conventional fixed peg arrangement, a country pegs its currency within a margin of ±1% versus another currency or a basket that includes the currencies of its major trading or financial partners. Market-determined exchange rates are a characteristic of an independently floating exchange rate regime.

Which of the following statements about a monopolist is most accurate? A monopolist will: A) maximize the average profit per unit sold. B) charge the highest price for which it can sell its product. C) produce where marginal revenue equals marginal cost.

C Like all price searchers, monopolists will expand output until marginal revenue equals marginal cost. Monopolists do not charge the highest possible price which would be the price resulting in only one sale. A monopolist seeks to maximize profit, not price.

Robert Necco and Nelson Packard are economists at Economic Research Associates. ERA asks Necco and Packard for their opinions about the effects of fiscal policy on real GDP for an economy currently experiencing a recession. Necco states that real GDP is likely to increase if both government spending and taxes are increased by the same amount. Packard states that if both government spending and taxes are increased by the same amount, there is no expected net effect on real GDP. Are the statements made by Necco and Packard CORRECT? NeccoPackard A)IncorrectIncorrect B)IncorrectCorrect C)CorrectIncorrect

C Necco is correct because the multiplier effect is stronger for government expenditures versus government taxes. All of the increase in government spending enters the economy as increased expenditure, whereas only a portion of the tax increase results in lessened expenditure (determined by the marginal propensity to consume), because part of the tax increase will come from the savings of the taxpayer (determined by the marginal propensity to save). Packard is incorrect; the effect on real GDP of an increase in government spending combined with equal increase in taxes will be positive because the multiplier effect is stronger for government spending versus the tax increase.

Non-financial sources of risk for an organization most likely include: A) credit risk. B) liquidity risk. C) solvency risk.

C Non-financial risks are those that arise from an organization's operations and from outside sources other than financial markets. Solvency risk is classified as a non-financial risk.

An equity hedge fund that uses technical analysis techniques to identify undervalued shares to buy and overvalued shares to sell short is best described as pursuing: A) a market neutral strategy. B) a special situations strategy. C) a quantitative directional strategy.

C Quantitative directional strategies employ technical analysis and may have net long or short exposure. A market neutral strategy maintains approximately equal values in long and short positions and is typically based on fundamental analysis. Special situations strategy is an event-driven strategy that involves investing in firms that are selling divisions or assets, distributing capital, or issuing or repurchasing securities.

A construction firm uses the percentage-of-completion method to recognize revenue from long-term contracts. In its next reporting period, the firm will adopt the converged accounting standards that were issued in May 2014. Compared to the prior accounting standards, in that period the firm is most likely to recognize: A) less revenue. B) more revenue. C) the same revenue.

C Revenue recognition for long-term contracts under the converged accounting standards issued in May 2014 is based on progress toward satisfying the performance obligations in the contracts, which is comparable to the percentage-of-completion method under the prior accounting standards.

Joshua Rosenberg, CFA, is an equity analyst who covers Northwest Implements, a farm implement manufacturer. Northwest's main factory is located in a sparsely inhabited region six hours by automobile from the nearest airport. Northwest has its own corporate jet and a landing strip is located near the facility. When Rosenberg contacts Northwest's management to gather information for a report he is preparing on the company, Northwest's chief financial officer, Thomas Blake, invites Rosenberg to visit Northwest's headquarters and meet with management. Blake offers to send Northwest's corporate jet to pick up Rosenberg from an airport near Rosenberg's home and to return him home the same evening. Rosenberg estimates that it would require three days for him to make the visit using commercial travel. If Rosenberg accepts Blake's offer and makes the trip to Northwest's headquarters on the corporate jet, Rosenberg: A)has violated the Code and Standards unless he reimburses Northwest for the cost of the trip. B)has violated the Code and Standards unless he discloses the trip and the payment of his travel expenses in his report on Northwest. C)has not violated the Code and Standards.

C Standard I(B) requires members to maintain independence and objectivity. A visit by an analyst to an out-of-the-way site may be paid for by a client company host as long as the analyst can maintain objectivity. Members should encourage clients to limit the use of corporate aircraft, but exceptions can be made if transportation would not otherwise be available or would be inefficient.

Mary Walters, CFA, is a bank trust officer who has entered into a referral agreement with Bob Sear, a tax attorney. Sear has told Walters that he will do her tax work in return for referrals. According to the CFA Institute Code and Standards, Walters must disclose: A) only the fact that she compensated for referrals, to any clients or prospects she refers to Sear. B) only the fact that she is compensated for referrals, to her employer and any clients or prospects she refers to Sear. C) the fact that she is compensated for the referrals and the nature of the compensation she is to receive, to her employer and any clients or prospects she refers to Sear.

C Standard VI(C) Referral Fees requires members and candidates to disclose any compensation received for referrals and the nature of the compensation, to their employers and to any clients or prospects they refer to others with the expectation of compensation in any form.

The J-curve, in the context of trade between two countries, refers to the fact that when the domestic country has a trade deficit: A) appreciation of the domestic currency initially leads to a decrease in the trade deficit but will increase the trade deficit in the long term. B) an increase in domestic inflation will initially increase the trade deficit but will decrease the trade deficit in the long term. C) appreciation of the foreign currency will initially increase the trade deficit but will decrease the trade deficit in the long term.

C The J-curve effect refers to a plot of the trade deficit over time when the domestic currency depreciates (the foreign currency appreciates). The trade deficit gets worse initially but then improves over time, either because export and import demand are more elastic in the long run or because existing contracts for future delivery are fixed in foreign currency terms in the short run.

The CFA Institute Code of Ethics most likely requires members and candidates to: A) not engage in activity which compromises the integrity of CFA Institute. B) stay informed on applicable laws and regulations that pertain to their respective areas of business. C) act with competence, integrity, and in ethical manner when dealing with the public, clients, employers, employees, and other market participants.

C The first requirement of the Code of Ethics is that members and candidates "act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets." Knowing the applicable laws and regulations is required by Standard I(A) Knowledge of the Law. Standard VII(A) Conduct as Participants in CFA Institute Programs requires members and candidates not to compromise the integrity of CFA Institute.

A discount brokerage firm states that the time between a customer order for a trade and the execution of the order is uniformly distributed between three minutes and fifteen minutes. If a customer orders a trade at 11:54 A.M., what is the probability that the order is executed after noon? A)0.750. B)0.500. C)0.250.

C The limits of the uniform distribution are three and 15. Since the problem concerns time, it is continuous. Noon is six minutes after 11:54 A.M. The probability the order is executed after noon is (15 - 6) / (15 - 3) = 0.75.

Archer Products is in an industry that has experienced low levels of price competition but recently excess capacity has led to aggressive price cutting. An analyst would be least likely to describe Archer's industry as: A) concentrated and with high barriers to exit. B) in the shakeout stage with low concentration. C) in the maturity stage with high barriers to entry.

C The maturity phase of an industry life cycle is not typically characterized by excess capacity or price competition. The conditions described may be consistent with a concentrated industry (typically characterized by low levels of price competition, since firms in the industry seek to avoid it) that is moving into the decline phase of an industry life cycle (excess capacity leads to aggressive price cutting, especially when barriers to exit are high). These conditions could also be consistent with an industry that is moving into the shakeout phase (characterized by developing excess capacity and intense price competition) following the growth phase (during which price competition is low).

An analyst using a one-period binomial model calculates a probability- weighted average of an option's values following an up-move and a down-move. According to this model, this average is most likely: A) equal to the option's value today. B) less than the option's value today. C) greater than the option's value today.

C The probability-weighted average calculated by the analyst is the option's value after one period. To estimate the option's value today, this result must be discounted by one period.

An analyst is determining the value of a put option with a one-period binomial model. Using an up-move size of 25% and a risk-free rate of 3%, the analyst calculates the following: Down-move size = 0.80 Up-move probability = 0.51 Down-move probability = 0.49 Value after up-move = $1.07 Value after down-move = $5.01 Probability-weighted average = 0.51($1.07) + 0.49($5.01) = $3.00 The analyst should determine that the value of the put option is: A)equal to $3.00. B)greater than $3.00. C)less than $3.00.

C The probability-weighted average is an estimate of the option's expected value after one period. To determine the option's value the analyst must discount this expected value by one period.

Compute the standard deviation of a two-stock portfolio if stock A (40% weight) has a variance of 0.0015, stock B (60% weight) has a variance of 0.0021, and the correlation coefficient for the two stocks is -0.35? A)1.39%. B)0.07%. C)2.64%.

C The standard deviation of the portfolio is found by: [W12σ12 + W22σ2 2+ 2W1W2σ1σ2ρ1,2]0.5 = [(0.40)2(0.0015) + (0.60)2 (0.0021) + (2)(0.40)(0.60)(0.0387)(0.0458)(-0.35)]0.5 = 0.0264, or 2.64%.

Allen Winkler, CFA, recently had lunch with Kim Thompson, a former professor of his, who told him of a new valuation model she had developed. Winkler recreated Thompson's model with some revisions and back-tested it using data provided by Standard & Poor's (S&P) with impressive results. Winkler's firm launches a mutual fund based on the revised model, and Winkler provides a discussion of the principles underlying the model and the test results. Is Winkler required to credit Thompson for having developed the model and S&P as the source of the data? A) Both of these sources must be cited. B) Neither of these sources must be cited. C) Only one of these sources must be cited.

C Under Standard I(C) Misrepresentation, Winkler must identify Thompson as having developed the original model to avoid the prohibition against plagiarism. The only permitted exception is using factual information published by recognized financial and statistical reporting services such as S&P.

Under U.S. GAAP, an asset is considered impaired if its book value is: A) less than its market value. B) greater than the present value of its expected future cash flows. C) greater than the sum of its undiscounted expected cash flows.

C Under U.S. GAAP, an asset is considered impaired when its book value is greater than the sum of the estimated undiscounted future cash flows from its use and disposal.

Maria Huffman is the Vice President of Human Resources for a large regional car rental company. Last year, she hired Graham Brickley as Manager of Employee Retention. Part of the compensation package was the chance to earn one of the following two bonuses: if Brickley can reduce turnover to less than 30%, he will receive a 25% bonus. If he can reduce turnover to less than 25%, he will receive a 50% bonus (using a significance level of 10%). The population of turnover rates is normally distributed. The population standard deviation of turnover rates is 1.5%. A recent sample of 100 branch offices resulted in an average turnover rate of 24.2%. Which of the following statements is most accurate? (Z-stat - 1.28) A)For the 50% bonus level, the test statistic is -5.33 and Huffman should give Brickley a 50% bonus. B)Brickley should not receive either bonus. C)For the 50% bonus level, the critical value is -1.65 and Huffman should give Brickley a 50% bonus.

C Using the process of Hypothesis testing: Step 1: State the Hypothesis. For 25% bonus level - Ho: m ≥ 30% Ha: m < 30%; For 50% bonus level - Ho: m ≥ 25% Ha: m < 25%. Step 2: Select Appropriate Test Statistic. Here, we have a normally distributed population with a known variance (standard deviation is the square root of the variance) and a large sample size (greater than 30.) Thus, we will use the z-statistic. Step 3: Specify the Level of Significance. α = 0.10. Step 4: State the Decision Rule. This is a one-tailed test. The critical value for this question will be the z-statistic that corresponds to an α of 0.10, or an area to the left of the mean of 40% (with 50% to the right of the mean). Using the z-table (normal table), we determine that the appropriate critical value = -1.28 (Remember that we highly recommend that you have the "common" z-statistics memorized!) Thus, we will reject the null hypothesis if the calculated test statistic is less than -1.28. Step 5: Calculate sample (test) statistics. Z (for 50% bonus) = (24.2 - 25) / (1.5 / √ 100) = −5.333. Z (for 25% bonus) = (24.2 - 30) / (1.5 / √ 100) = −38.67. Step 6: Make a decision. Reject the null hypothesis for both the 25% and 50% bonus level because the test statistic is less than the critical value. Thus, Huffman should give Soberg a 50% bonus. The other statements are false. The critical value of -1.28 is based on the significance level, and is thus the same for both the 50% and 25% bonus levels.

Tonya Tucker, CFA, is a financial analyst at Bowron Consolidated. Bowron has numerous subsidiaries and is actively involved in mergers and acquisitions to expand its businesses. Tucker analyzes a number of companies, including Hanchin Corporation. When Tucker speaks with the CEO of Bowron, she indicates that many of the companies she has looked at would be attractive acquisition targets for Bowron. After her discussion with the CEO, Tucker purchases 100,000 shares of Hanchin Corporation at $200 per share. Bowron does not have any pre-clearance procedures, so the next time she meets with the CEO, Tucker mentions she owns shares of Hanchin. The CEO thanks her for this information but does not ask for any details. Two weeks later, Tucker sees a company-wide email from the CEO announcing Bowron's acquisition of Hanchin for $250 a share. With regards to her purchase of Hanchin stock, Tucker least likely violated the CFA Institute Standards of Professional Conduct concerning: Loyalty. Priority of Transactions. Material Nonpublic Information.

C is correct because there is no indication the analyst had access to material nonpublic information and was in violation of Standard II(A)-Material Nonpublic Information. Specifically, Tucker did not have information concerning any decision by Bowron to acquire Hanchin stock since she is not a part of the decision-making team at Bowron, which determines the companies it plans to take over. The analyst had indicated numerous companies were viable options for takeover, and she did not single out any one company in particular.

A country having a current account deficit most likely will still be able to consume more output than it produces by: adjusting interest rates to stimulate higher domestic savings. restricting foreign direct investment. increasing its net foreign liabilities.

C is correct. A current account deficit must be offset by a capital account surplus. Only by borrowing money from foreigners can a country have a current account deficit and consume more output than it produces. An increase in net foreign liabilities is the result of borrowing from foreigners.

When a new project reduces the cash flows of an existing project of the same firm, it is best described as a(n): sunk cost. opportunity cost. externality.

C is correct. A new project reducing the cash flows of an existing project is an externality called cannibalization.

. A firm in a market environment characterized by monopolistic competition is most likely to: continue to experience economic profit in the long run. have a well-defined supply function reflecting its marginal and average costs. have many competitors each following its own product differentiation strategy.

C is correct. As the name implies, monopolistic competition is a hybrid market structure. The most distinctive factor in monopolistic competition is product differentiation. Although the market is made up of many firms that compose the product group, each producer attempts to distinguish its product from that of the others, and product differentiation is accomplished in a variety of ways.

The least likely reason investors incorporate environmental and societal factors into their investment analysis is to: improve investment performance. have a more comprehensive understanding of a company's risks. limit investments to those equities that are consistent with their moral or ethical values.

C is correct. Environmental, social, and governance investment analysis can be implemented across all asset classes and is not limited to equity investments. It is done to provide a more comprehensive understanding of a company's risks and improve investment performance.

The elasticity of demand for a good is most likely greater when: a lesser proportion of income is spent on the good. the good is a necessity. 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.

When forecasting earnings, an analyst's best approach is to: establish a precise forecast based on the results of economic and financial analysis. calculate a range of possibilities based on the results of financial analysis. utilize the results of financial analysis and professional judgment.

C is correct. Forecasts are not limited to a single point estimate but should involve a range of possibilities. The results of financial analysis are integral to this process, along with judgment of the analysts.

An advantage to the lessee in a leasing agreement is most likely: economies of scale in servicing assets. tax benefits associated with interest expense. lower financing costs than purchasing the asset.

C is correct. Leases can provide less costly financing for the lessee because they usually require little, if any, down payment and often are at lower fixed interest rates than those incurred if the assets were purchased.

Two risk managers are discussing how an organization's risk tolerance should be determined. The first manager says, "The risk tolerance must reflect the losses or shortfalls that will cause the organization to fail to meet critical objectives." The second manager responds, "The risk tolerance must reflect the external forces that bring uncertainty to the organization." Which of them is most likely correct? The second risk manager The first risk manager Both risk managers

C is correct. The risk tolerance of an organization should reflect both an "inside" view and an "outside" view. The inside view asks what level of loss will leave the organization unable to meet critical objectives. The outside view asks what sources of uncertainty or risk the organization faces.

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

C is correct. The security market line is a graphical representation of the CAPM with beta on the x-axis and expected return on the y-axis. The slope of the line is given by the market risk premium, the difference between the equity market return and the risk-free rate of interest.

The following information is available for an asset purchased at the start of its first year of operations (Year 1): Purchase price: $1.8 million Estimated useful life: 5 years Estimated residual value: $500,000 If the company uses the double declining balance method of depreciation, the depreciation expense in Year 3 will be closest to: $187,200. $259,200. $148,000.

C is correct. Under the double declining balance approach, the depreciation rate applied to the carrying amount is double the depreciation rate for the straight-line method. Because the rate for the straight-line method is 20% (1/5), the double declining rate is 40%. Depreciation expense is recorded until the net book value (NBV) reaches the residual value.

An analyst is testing the hypothesis that the variance of monthly returns for Index L equals the variance of monthly returns for Index M based on samples of 50 monthly observations. The sample variance of Index L returns is 0.085, whereas the sample variance of Index M returns is 0.084. Assuming the samples are independent and the returns are normally distributed, which of the following represents the most appropriate test statistic?

F-TEST

Bayes' Formula

P(Event | Information) = (P(Information | Event) * P(Event)) / P(Information)

Performance measurement is a part of the _________________ of the portfolio management process

feedback step