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CFA > Cfa Level 1 > Flashcards

Cfa Level 1 Flashcards

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1
Q

What is the application best described as when using fintech to assess the frequency of the word ‘assumption’ in a company’s annual financial report?

A

A) text analytics.

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2
Q

Formula for receivables turnover

A

Sales/Accounts Receivable

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3
Q

What is the coefficient of variation formula?

A

Standard deviation/mean

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4
Q

What is the inflation rate central banks typically target?

A

Around 2%

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5
Q

What is needed to construct the pro forma cash flow statement?

A

Balance sheet and income statement

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6
Q

What are multiple securities?

A

Liquid financial instruments that can be quickly converted into cash at a reasonable price these include treasury bills commercial paper, marketable equity securities

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7
Q

Does contractionary monetary policy increase or decrease interest rates?

A

Higher interest rates

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8
Q

What is the formula for days of inventory on hand?

A

365/inventory turnover

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9
Q

What are the typical steps in the capital allocation process?

A

Generating ideas, analysing project proposals, creating the firm wide capital budget, and monitoring decisions, and conducting a post audit

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10
Q

What is the formula for free cash flow to the firm (FCFF)?

A

Cash flow from operations + interest expense net of tax - net capital expenditure

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11
Q

Out of arithmetic mean geometric mean and harmonic mean what is the order from largest smallest?

A

Arithmetic mean is greater than the geometric mean, which is greater than the harmonic mean

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12
Q

A relationship between shareholders and managers of a company is?

A

Principal agent relationship where the shareholders are the principal and the managers are the agents

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13
Q

Formula for compound annual index return over a period?

A

[(1+HPR)^(1/yr) ]-1

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14
Q

What is convenience yield?

A

Convenience yield is the non-monetary benefit of physically holding a commodity, instead of holding a futures contract for it.

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15
Q

What is contango?

A

FT>SP

Investors expect future delivery to be more expensive.

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16
Q

What is backwardation?

A

SP>FP

Occurs when convenience yield is high.

Holding the commodity now is more valuable than later delivery.
High current demand, low supply.

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17
Q

What type of private capsule is most likely to have the lowest risk and return?

A

Infrastructure debt

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18
Q

What are porters five forces primarily concerned with?

A

The determinants of industry profitability

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19
Q

For a bond trading at a discount:

A

It’s currently yield and YTM are both higher than the coupon rate

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20
Q

The investment needs a property-casualty insurer are categorised by what type of time horizon and risk tolerance

A

Short term time horizon and low risk tolerance

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21
Q

What does high watermark insure and who does it protect?

A

High watermark protects investors

Manager only earns performance fee on new highs

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22
Q

What does clawback provision insure and who does it protect?

A

Protect investors

Manager must return performance fees if fund underperforms overall

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23
Q

What does catch-up provision insure and who does it protect?

A

Protect managers

Manager receives 100% of profits after hurdle, until their agreed share is reached

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24
Q

What is a secondary sale?

A

A private equity firm sells one of its portfolio companies to a group of investors or another private equity firm

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25
Benefits of alternative investments
Illiquidity premiums generating potentially higher returns
26
Explain the callable bond
A bond that gives the issuer the right to redeem (call) the bond before maturity, usually at a specified price and after a certain period. Issuer's option to repay early. Typically includes a call schedule and call price (often above par initially).
27
Explain putable bond
A bond that gives the investor the right to sell (put) the bond back to the issuer before maturity, usually at par. Investor's option to exit early. Typically includes put dates and conditions (e.g., after 5 years).
28
Financial markets are said to be operationally efficient if:
Transaction costs are low
29
What is the formula for modified duration?
Macaulay Duration/(1+YTM)
30
What is unsystematic risk?
The risk that is unique to particular Company, industrial or asset
31
Margin call formula
Original price * [(1 - initial margin)/(1 -maintenance margin)]
32
What are supranational bond?
Issued by multilateral agencies such as World Bank or international monetary fund
33
What is hyperbolic discounting?
Refers to favouring small payoffs in the short term over larger payoffs in the long term. Is related to self control bias.
34
For a callable bond is zero volatility spread larger for small than an option adjusted spread.
Larger
35
Management fees for hedge funds most likely calculated as a percentage of ?
Assets under management
36
An increase in an option free bond yield to maturity what happen to interest rate risk.
Decrease its interest rate risk
37
What is negative screening ?
Practise of excluding companies based on ESG factors
38
What is management buyout (MBO)?
Investor group that includes firms key management purchase all outstanding shares of a public company in order to take it private.
39
Current yield formula
Annual coupon / bond price
40
What are the 3 major steps in portfolio management process?
Planning Execution Feedback
41
Difference between approximate converts and effective convexity?
Effective convexity accounts for the effects of embedded options while approximate convexity does not.
42
Diluted eps less then basic eps is it dilutive or anti dilutive
Dilutive
43
What is a simple capital structure?
No potentially dilutive securities eg: convertible bonds, warrents
44
Under ifrs a loss from the destruction of property in a fire would most likely classified as: continuing operations, discontinued operations, other comprehensive income
Continuing operation
45
In a common size balance sheet each line item is stated as a percentage of ?
Total assets
46
What is accounting goodwill
The amount by which the purchase price of an acquired firm is greater than the fair value of its identifiable net assets
47
What is economic goodwill
Value from the expected future performance of a firm
48
An analyst using vertical common size analysis is likely to express each item on the income statement as a percentage of?
Sales
49
What is an original issue discount (OID) tax provision?
OID is the difference between the bonds issue price and its par value. In countries with an OID tax rule investors must report a proportion of the discount as interest income each year . This increases the bonds cost basis annually At maturity the cost basis equals the par value so no capital gain or lost is realise
50
What is a quasi- government bond?
These are issued by entities created by national governments for specific purposes such as finance and infrastructure investments or providing mortgage financing
51
On the run, sovereign debt securities are what?
Used for benchmark yield analysis 
52
A professional organisation most appropriately enforces upon its members: A) legal standards only B) ethical standards only C) both legal and ethical standards.
B
53
Does LIFO typical have lower assets and lower tax than FIFO
Yes
54
What is the most likely effect of placing a tariff on imports of a good? A) decrease produce for domestic producers B) decrease quantity of good supplied by domestic producers. C) decrease quantity of good demanded in the domestic market.
Answer is C A Tariff raises yeah, the domestic prices of imported goods as a result. Quantity demanded in the domestic market decreases due to higher prices. domestic producers benefit from higher price so their producer surplus increases.
55
The standard error of estimate in a simple linear regression is equal to
The square root of the mean squared error
56
When a company grants stock options to employees the company is required to: A) value the option using the black scholes Merton model B) disclose how the options affect the income statement and balance sheet C) recognise the fair value of the options as an expense in the period of the grant date
B
57
If reporting is aggressive what do you want for profit and assets
Both to increase
58
Information a symmetry refers to the fact that management has more information about a company then?
Shareholders
59
What is neutral/ natural interest rate ?
If interest rate above this then slows economy down, if interest rate below this then economic growth. This is the sum of the long-term growth rate of real economic output and the target inflation rate
60
What are valuation allowance?
Valuation allowance accounts only apply to deferred tax assets and are creative when it becomes probable that the company will not have enough future income to realise the full value of the deferred tax assets
61
What is non parametric test?
Data that are ranked (ordinal) rather than presented as values are best evaluated using a nonparametric test.
62
ROE formula
Tax burden x interest burden x EBIT margin x asset turnover x leverage
63
The capital structure theory that implies an optimal capital structure employing both debt and equity is packing order theory or static trade-off theory or Modigliani and Miller with taxes
Static trade off theory
64
Asset turnover formula
Sales/average total assets
65
Difference between quality of reported results and financial reporting quality
Adequacy and sustainability of earnings are issues related to quality of reported results. Financial reporting quality refers to issues related to the relevance and faithful representation of financial report.
66
What does a positive net present value (NPV) imply about the internal rate of return (IRR) relative to the discount rate?
IRR is greater than the discount rate
67
Compare to a normal distribution historical returns a major asset classes in develop markets have exhibited
More frequent large negative deviations
68
Formula for gross margin
Gross profit/ sales
69
If the bonds Macauley duration is lower than the investor investment horizon, what risk dominate
Reinvestment risk
70
In the context of private debt, a single loan that combines secured and unsecured classes of debt is best described us Mezzanine debt Unitranche debt Leverage loan
Unitranche debt
71
What is solvency risk?
The risk that an organisation will not be able to operate because it ran out of cash
72
What is liquidity risk?
The restart an asset will be sold at a loss at a price below the assets underlying fair value due to the market conditions at the time of the sale
73
What is strategy beta?
The return attributable to a funds sector exposure
74
What is alpha?
The returns attributable to a fund security selection
75
What is market beta
The return attributable to a broad market index
76
Our finite life or indefinite life more appropriate for riskier real estate investment strategies
Finite life
77
Multilateral trading facilities are most accurately described as
Alternative trading systems This serve the same trading functions as exchanges but have no regulatory function
78
What is it unsystematic risk?
Risk that is unique to a particular company or industry it is the type of risk that can be reduced or eliminated through diversification
79
What is systematic risk?
Risks that affect the entire market with broad range of assets it is caused by factors that are external to individual companies or industries and cannot be eliminated through diversification
80
What does Treynor measure express
Excess return per unit of systematic risk
81
To construct a forward yield curve what do the Forward rates need to be like?
Each forward Same length different period
82
Contingent convertible bonds are described most accurately as those which if a specific event occurs Become convertible to equity Convert automatically equity Increase the equity conversion ratio
Convert automatically to equity 
83
What does delta measure ?
The sensitivity of a derivatives value to the price of its underlying asset
84
What is gamma
Measure sensitivity of delta to price of underlying asset
85
What is beta
Measures the market risk of security
86
What is portfolio duration
Weighted average of component securities using full price
87
Do banks pay interest on checking deposits
No, only pay interest on interbank and central bank FUNDS
88
What does convenience yield not include in benefit of holding underlying ?
Monetary benefits such interest income and dividends
89
What is strategic asset allocation
Portfolio manager select asset class weights based on strategy the clients risk, tolerance etc
90
What is tactical asset allocation
Short term, taking advantage of market moves
91
Core satellite approach
Most of money is risk free is passive managed, the slight minority is active managed
92
What is a call market
Stock trades at specific times at one price that clears the market for the stock
93
What is continuous market
Like stock exchange, any time market open and prices set by auction or by dealer bid ask quotes
94
Formula for enterprise value
EV= market value of firm common stock and debt minus cash and short term securities

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