Mock Exam 1

Question 1

CFA Institute’s Professional Conduct Program (PCP):

Answer 1

Optional for members to accept or reject: Members can accept or reject a disciplinary sanction proposed by the Professional Conduct Program staff. (If the member rejects the sanction, the matter is referred to a hearing before a disciplinary review panel of CFA Institute members. The other statements are accurate.) ( Module 70.1, LOS 70.a)
- Possible sanctions include condemnation by a member’s peers or suspension of a candidate’s participation in the CFA Program.
- Members who cooperate with a PCP inquiry by providing confidential client information to PCP staff are not in violation of Standard III(E) Preservation of Confidentiality.

Question 2

Robert Miguel, CFA, is a portfolio manager. On Saturday, one of his clients invited Miguel and his wife to be his guests at his luxury suite for a major league baseball playoff game, which they did. Miguel told his supervisor on Monday that they had attended the game with the client and that the suite was luxurious. Miguel has:

Answer 2

Important*
In this case, Miguel has not violated the standards. For a gift from a client in appreciation of past service or performance, informing his supervisor verbally is sufficient. Standard I(B) Independence and Objectivity requires disclosure prior to accepting the gift “when possible,” but in cases such as this when there is short notice, notification afterward is permitted.

(Module 73.1, LOS 73.b)

Question 3

At his golf club on Saturday morning, Paul Corwin, CFA, sees Frank Roberts, a friend and institutional client of his, who tells him that he is planning to sell his house on the 7th fairway. While golfing that day, Corwin tells Robert Lowe, a realtor, that Roberts is planning to sell his house and may need a realtor. He also tells Lowe that he manages an equities account for Roberts. If Corwin has not received permission from Roberts, he has violated the Standard on preservation of confidentiality:

Answer 3

Answer: by disclosing that Roberts is a client of his but not by mentioning Roberts’ plan to sell his home.

Corwin violated Standard III(E) Preservation of Confidentiality by revealing his business relationship with Roberts without permission. Because the information that Roberts’ plans to sell his home is not received as part of his professional relationship with Roberts, it is not covered by the Standard.

(Module 73.1, LOS 73.b)

Question 4

Doug Watson, CFA, serves in a sales position at Sommerset Brokerage, a registered investment adviser. Watson frequently drinks excessively. On one occasion, Watson was cited by local police for misdemeanor public intoxication. According to the Standard on knowledge of the law and the Standard on misconduct, Watson is in violation of:

Answer 4

“Only work with the information provided; don’t make assumptions.”

“Did he violated any rules that apply to his professional activity?” Answer: no

Watson’s excessive drinking is unfortunate, but we have no evidence that it has affected his work, professional integrity, judgment, or reputation. If he commits an act involving fraud or dishonesty, he would violate the Standard on misconduct.

(Module 73.1, LOS 73.b)

Question 5

Peter Taylor, a CFA charterholder and a food industry analyst for a large investment firm, has been invited by Sweet Pineapple Co. to visit the firm’s processing plants in Hawaii. The Standard concerning independence and objectivity recommends that Taylor:

Answer 5

The recommended procedures for compliance with Standard I(B) Independence and Objectivity include the recommendation that analysts on company visits pay their own travel expenses and use commercial transportation if it is available.

(Module 73.1, LOS 73.b)

Question 6

Ruth Brett, a Level I CFA candidate, feels nervous and unprepared the night before the exam. Brett writes a few key notes on the bottom of her shoe. At the exam, Brett sees the large number of proctors present and decides not to risk getting caught and does not look at her shoe. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, Brett is:

Answer 6

Brett violated both the Code of Ethics and Standard VII(A) Conduct as Participants in CFA Institute Programs. By writing down information from the Candidate Body of Knowledge and taking it into the exam room, she compromised the integrity of the exam, whether she used the notes or not. Her actions are also in violation of the Code of Ethics by not acting “with integrity, competence, diligence, respect, and in an ethical manner.”

(Module 73.1, LOS 73.b)

Question 7

Which of the following is least likely included in the CFA Institute Code of Ethics? Members of CFA Institute must:

Answer 7

Answer: place their clients’ interests before their employer’s interests. (the statement is true but it is not included in the Code of Ethics)

place their clients’ interests before their employer’s interests and use reasonable care and exercise independent professional judgment.
are included in the Code of Ethics. “Look for the work ‘professional’”

Question 8

In formulating her report on GammaCorp’s common stock, Barb Kramer, CFA, did a complex series of statistical tests on the company’s past sales and earnings. Based on this statistical study, Kramer stated in her report that, “GammaCorp’s earnings growth for the next five years will average 15% per year.” Her conclusion was based in part on a regression analysis with a high level of statistical significance. Has Kramer violated the Standard on communication with clients and prospective clients?

Answer 8

Kramer violated Standard V(B) Communication with Clients and Prospective Clients. The problem is with the word “will.” Kramer should have used “is estimated to be” to separate fact from opinion. Statistical estimates of future events are subject to change and should not be presented as certainties. She doesn’t need to give complete details of the statistical model but should indicate its general characteristics and the important factors involved in her projections.

(Module 73.1, LOS 73.b)

Question 9

Dudley Thompson is a bond salesman for a small broker/dealer in London. His firm is the lead underwriter on a new junk bond issue for Ibex Corporation, and Thompson has sent details of the offering to clients. Thompson calls only his accounts over £1,000,000 for whom he thinks the issue is suitable. Thompson also posts his firm’s optimistic projections for Ibex’s performance in several Internet chat rooms. According to the Standards concerning market manipulation and fair dealing, Thompson is in violation of:

Answer 9

There is no market manipulation because there wasn’t any misleading information.
He didn’t violated fair dealing because he send the details to all the client. However, called only the suitable ones. ‘fairly doesn’t mean equally’.

Thompson has not violated Standard II(B) Market Manipulation by posting his firm’s projections for Ibex. A firm’s recommendation of a security may increase its price without any intent to mislead the market. The firm has disseminated the details of the offering to its clients fairly, so Thompson may call individual clients without violating the Standard III(B) Fair Dealing.

(Module 73.1, LOS 73.b)

Question 10

Rob Elliott, CFA, is an analyst with a large asset management firm. His personal portfolio includes a large amount of common stock of Tech Inc., a semiconductor company, which his firm does not currently follow. The director of the research department has asked Elliott to analyze Tech and write a report about its investment potential. Based on the CFA Institute Standards of Professional Conduct, the most appropriate course of action for Elliot is to:

Answer 10

The analyst would decline to write the report but simply disclosing is enough.

According to Standard VI(A) Disclosure of Conflicts, Elliott should disclose his beneficial ownership of Tech to his employer and to clients and prospects because such ownership could interfere with his ability to make unbiased and objective recommendations. Selling his shares and declining to write the report are not required and are more extreme than simply disclosing the potential conflict.

(Module 73.1, LOS 73.b)

Question 11

According to the recommended procedures for complying with the Standard on suitability, which of the following statements regarding an investment policy statement (IPS) is least accurate?

Answer 11

Frequency of the IPS update.

Standard III(C) Suitability requires that members and candidates update client information (the IPS) at least annually. The IPS can be updated more frequently if there are significant changes in the investment strategy or client characteristics.

(Module 73.1, LOS 73.b)

Question 12

According to the Standard related to loyalty, prudence, and care, which of the following statements regarding the voting of proxies on client holdings is least accurate?

Answer 12

Answer: An investment management firm should vote all proxies on client holdings unless the client reserves that right. ‘The problem with the statement is the world “all”. The manager will only vote all proxies after running the cost benefit analysis.’

Standard III(A) Loyalty, Prudence, and Care does not require the voting of all proxies. A cost-benefit analysis may support the conclusion that the voting of all proxies is not beneficial to the client in light of the time and effort required. Voting on nonroutine issues that have a material impact is required.

Question 13

According to the Code and Standards, members and candidates who are involved in distributing an initial public offering (IPO) of equity shares and wish to participate in the IPO:

Answer 13

Standard VI(B) Priority of Transactions recommends, but does not require, that a member or candidate obtain pre-clearance from his or her supervisor before participating in an equity IPO. Guidance for Standard III(B) Fair Dealing states that members and candidates distributing IPO shares must distribute shares in an oversubscribed IPO to clients and may not withhold shares for themselves. (Module 71.8, LOS 71.b)

Priority of transactions: 1. Client; 2. Employer; 3. Candidate

Oversubscribed: more demand for the IPO than what it is available

Member should obtain pre-clearance but it is not mandatory.

If there is a conflict of interest, the member shouldn’t participate in the IPO. However, their involvement will not create conflict of interest in the first place.

Question 14

Linda Bryant, CFA, is an employee of Roomkin Investment House, which underwrites equity and debt offerings. She has been approached by SimthCo to consult on a private debt placement. According to CFA Institute Standards of Professional Conduct, before Bryant agrees to accept this job, she is required to:

Answer 14

To comply with Standard IV(B) Additional Compensation Arrangements, Bryant must obtain written consent from her employer before undertaking the independent consulting project. Bryant must also provide a description of the types of services being provided, the length of time the arrangement will last, and the compensation she expects to receive for her services. (Module 71.6, LOS 71.b)

Question 15

Amy Brooks, a Level III CFA candidate, has been given supervisory responsibilities. In carrying out her responsibilities, Brooks has discovered that the firm’s compliance system is inadequate. She informed her supervisor, who is not supportive of Brooks’s efforts to correct the situation. According to CFA Institute Standards of Professional Conduct, Brooks:

Answer 15

Standard IV(C) Responsibilities of Supervisors indicates that a member should decline supervisory responsibility in writing until the firm adopts reasonable compliance procedures. Otherwise, Brooks cannot adequately exercise her responsibility. (Module 71.6, LOS 71.b)
She doesn’t need to dissociate herself from the firm.

Question 16

Excluding the results of terminated accounts when calculating historical performance is recommended by:

Answer 16

Standard III(D) Performance Presentation recommends that terminated accounts be included in historical performance calculations. (Module 72.1, LOS 72.c)

Question 17

Derek Stevens, CFA, manages the pension plan assets of Colors, Inc. When voting proxies for plan equities, Stevens owes a fiduciary duty to:

Answer 17

Under Standard III(A) Loyalty, Prudence, and Care, the fiduciary duty in this case is to plan participants and beneficiaries, not shareholders or plan trustees. (Module 71.4, LOS 71.b). it is not the plan trustees who hired him.

‘Who is the client?’

Question 18

An analyst at Romer changes her rating on TelSky from “buy” to “hold” and sends an email explaining the change to all clients and firm brokers. Subsequently, Paul Stevens, CFA, a broker at Romer, receives a call from a client who wants to buy 15,000 shares of TelSky. Stevens must:

Answer 18

According to Standard III(B) Fair Dealing, if a client places an order that goes against the firm’s recommendation for that security, members and candidates should inform the client of the discrepancy between the order and the firm’s recommendation before accepting the order. ( Module 71.4, LOS 71.b)

Question 19

Greg Hoffman, CFA, has been offered a cash payment by Hill Manufacturing, Inc. to write a research report on their company. According to the Code and Standards, Hoffman:

Answer 19

Standard I(B) Independence and Objectivity requires disclosure of the nature of any compensation from the subject company. Standard VI(A) Disclosure of Conflicts more generally requires disclosure of any potential conflict of interest in research reports and investment recommendations. (Module 71.8, LOS 71.b)

Question 20

Shan Ang, CFA, is a portfolio manager at Huang Investments. Lian Jan, an old friend of Ang’s, is an executive recruiter in the same city. Jan proposes that she will refer any high-level executives that she places locally to Ang, in exchange for one round of golf at Ang’s country club for each new client. According to the Standard concerning referral fees, Ang would be required to disclose this referral arrangement:

Answer 20

The rule is that the manager has to disclose the referral fee information to the stakeholders as appropriate.

Standard VI(C) Referral Fees states that members and candidates must disclose to employers and to affected prospects and clients, before entering into any formal agreement for services, any benefits received for the recommendation of services provided by the member. (Module 71.8, LOS 71.b)

Question 21

Which of the following statements about a United States public corporation’s annual reports, SEC filings, and press releases is most accurate?

Answer 21

Besides the annual SEC filings, an analyst should examine a company’s quarterly or semiannual filings. These interim filings typically update the major financial statements and footnotes, but are not necessarily audited. Annual reports to shareholders and press releases are written by management and are often viewed as public relations or sales materials. (Module 16.2, LOS 16.e)

Annual and quarterly SEC filings should but not must have to be audited.

Incorrect: Annual reports to shareholders are typically the most factual and objective source of information about a company. (not always objective)

Question 22

Which of the following is most likely a motivation for a company’s management to issue low-quality financial reports?

Answer 22

Motivation vs Opportunity

Meeting or exceeding its own earnings guidance is a possible motivation for management to issue low-quality financial reports. Inadequate board oversight and wide ranges of acceptable accounting treatments are more appropriately viewed as opportunities for issuing low-quality financial reports. (Module 26.1, LOS 26.e)

Question 23

Haltata Turf & Sod currently uses the first in, first out (FIFO) method to account for inventory. Due to significant tax-loss carryforwards, the company has an effective tax rate of zero. Prices are rising and inventory quantities are stable. If the company were to use last in, first out (LIFO) instead of FIFO:

Answer 23

In the absence of taxes, there is no difference in cash flow between LIFO and FIFO. In addition, using LIFO would result in lower working capital (inventory is lower). Using LIFO would result in lower net income because of a lower gross margin (cost of goods sold is higher). (Module 22.5, LOS 22.l)

Question 24

The converged standards identify a five-step process1 for recognizing revenue:

Answer 24

1 Identify the contract(s) with a customer.
2 Identify the separate or distinct performance obligations in the contract.
3 Determine the transaction price.
4 Allocate the transaction price to the performance obligations in the contract.
5 Recognize revenue when (or as) the entity satisfies a performance obligation.

Question 25

A company's investments in marketable securities include a 3-year tax-exempt bond measured at amortized cost and a 5-year government note measured at fair value through other comprehensive income. On its income statement, the company should report the coupon interest received from:

Answer 25

Interest and dividends received are reported as income, regardless of the balance sheet classification of marketable securities. (Module 19.6, LOS 19.e)

Question 26

A central bank's ability to achieve its policy goals is most likely to be limited by available resources when which of the following actual rates is below its target rate?

Answer 26

With exchange rate targeting, a central bank's ability to increase the value of the domestic currency is limited by the amount of foreign reserves the country has available to buy its own currency in the foreign exchange market. 'The ability to determine the exchange rate is based on how much overseas currency the central bank is allowed/ can hold.' While inflation targeting and interest rate targeting have limitations (e.g., liquidity trap conditions may exist, interest rates are bounded by zero), the central bank's resources are not typically a limitation. (Module 12.2, LOS 12.n)

Question 27

Acme Corp. purchased a new stamping machine for $100,000, paid $10,000 for shipping, and paid $5,000 to have it installed in their plant. Based on an estimated salvage value of $25,000 and an economic life of six years, the difference between straight-line depreciation and double-declining balance depreciation in the second year of the asset's life is closest to:

Answer 27

Must include the extra cost related to the item. Note: the denominator doesn't change. Straight line depreciation is (100,000 + 10,000 + 5,000 − 25,000) / 6 = 15,000 each year. Double-declining balance depreciation in the second year is: 115,000 (2/3)(1/3) = 25,556. The difference is $10,556. Remember that salvage value is not part of the declining balance calculation. (Module 18.3, LOS 18.d)

Question 28

An analyst estimates a stock has a 40% probability of earning a 10% return, a 40% probability of earning a 12.5% return, and a 20% probability of earning a 30% return. The stock's standard deviation of returns based on this returns model is closest to:

Answer 28

Explanation Expected value = (0.4)(10%) + (0.4)(12.5%) + (0.2)(30%) = 15% Variance = (0.4)(10 − 15)^2 + (0.4)(12.5 − 15)^2 + (0.2)(30 − 15)^2 = 57.5 Standard deviation = √57.5 = 7.58% (Module 3.3, LOS 3.l)

Question 29

Shortfall risk is best described as the probability:

Answer 29

Shortfall Risk: prof that portfolio value will fall below some minimum level at a future date. Downgrade Risk: prob of a credit rating downgrade due to possible earnings shortfalls. Default Risk: prob that portfolio value will fall below some minimum level at a future date. (Module 4.2, LOS 4.k)

Question 30

Longboat, Inc., sold a luxury passenger boat from its inventory on December 31 for $2,000,000. It is estimated that Longboat will incur $100,000 in warranty expenses during its 5-year warranty period. Longboat's tax rate is 30%. To account for the tax implications of the warranty obligation prior to incurring warranty expenses, Longboat should:

Answer 30

Warranty expense should be recorded when the inventory item covered by the warranty is sold. A deferred tax asset is created when warranty expenses are accrued on the financial statements but are not deductible on the tax returns until the warranty claims are paid. The full amount of the obligation, $100,000, is recorded as an expense, with a deferred tax asset of $30,000. Note that a deferred tax asset results when taxable income is more than pretax income and the difference is likely to reverse (warranty will be paid) in future years. (Module 24.2, LOS 24.c) 'more tax is charged now to the tax authorities, but it will be relieved in the future'

Question 31

The presentation format of balance sheet data that standardizes the first-year values to 1.0 and presents subsequent years' amounts relative to 1.0 is:

Answer 31

On a horizontal common-size balance sheet, the divisor is the first-year values so they are all standardized to 1.0 by construction. Trends in the values of these items as well as the relative growth in these items are readily apparent. A vertical common-size balance sheet expresses all balance sheet accounts as a percentage of total assets and does not standardize the initial year. (Module 21.1, LOS 21.a)

Question 32

For 20X1, Belcher Motors reported a decrease in its deferred tax liabilities, a decrease in its deferred tax assets, and an increase in its valuation allowance. To an analyst, this would most likely suggest that the company has:

Answer 32

The increase in the valuation allowance tells us that the company has decreased its estimate of its future profitability and thus its ability to realize the benefits of its deferred tax assets. A longer period for recognition of unearned revenue would not affect the temporary differences reflected in deferred tax assets. Increasing the estimate of assets' useful lives would tend to slow financial statement depreciation relative to depreciation for tax, which would increase deferred tax liability going forward, other things constant. Decreases in the carrying values of both a DTL and a DTA may reflect a decrease in the tax rate. (Module 24.4, LOS 24.h)

Question 33

Type I error and Power of a Test:

Answer 33

Type I error is rejecting the null hypothesis when it is true. The power of a test is the probability of rejecting the null hypothesis when it is false.

Question 34

Money Supply and determination of short-term interest rates

Answer 34

Demand for money is downward slope and Supply for money is inelastic. At equilibrium, the growth in real GDP tends to increase the demand for money. If the short-term interest rate is greater than equilibrium rate, there will be excess supply of real money balances.

Question 35

Jackknife vs Bootstrap

Answer 35

The bootstrap method involves drawing repeated samples of size n from the same data set and calculating the standard deviation of the resulting sample means. The jackknife method involves calculating multiple means from the same sample, each with one observation removed, and calculating the standard deviation of those means. (Module 5.2, LOS 5.i)

Question 36

An analyst gathered the following data about a company: Collections from customers are $5,000. Depreciation is $800. Cash expenses (including taxes) are $2,000. Tax rate = 30%. Net cash increased by $1,000. If inventory increases over the period by $800, cash flow from operations equals:

Answer 36

The change in inventory is already included in the cash expense. Use direct method to calculate CFO: Collections from customers $5,000 Cash expenses –$2,000 Cash flow from operations $3,000

Question 37

Odds:

Answer 37

Odds is different than probability If prob is 20%, the odds would be 1:4

Question 38

Compared to reporting in a country where life insurance payments on key employees are deductible for tax, a company that makes such payments and reports in a country in which they are not tax deductible would report:

Answer 38

Higher effective tax rate. Statutory tax rate is an external rate (has nothing to do with this question). Deferred tax asset is for temporary difference (will be reversed in the future). This case is a permanent change.

Question 39

Pat Bannerman is analyzing economic indicators to form an opinion on whether an economic contraction has ended. Which of the following turning points should Bannerman most appropriately interpret as a coincident indicator suggesting economic growth is entering the early stage of a new expansion?

Answer 39

Real personal income is a coincident indicator with turning points that tend to coincide with business cycle turning points. The unemployment rate is a lagging indicator, here suggesting an expansion has been underway for some time. Building permits are a leading indicator because builders may seek permits in anticipation of an economic expansion that has not begun yet. (Module 11.2, LOS 11.e)

Question 40

Calculating continuously compounded returns

Answer 40

Ln ( )

Question 41

Fisher effect

Answer 41

Fisher effect: Nominal Interest Rate = Real Interest Rate + Expected Inflation

Question 42

A permanent difference between pretax and taxable income is least likely to arise when a firm:

Answer 42

The installment sales method of revenue recognition does not result in permanent differences between pretax and taxable income. Premium payments on life insurance of key employees is an expense on the financial statements, but is not deducted on tax returns. Tax exempt interest is recognized as revenue on the financial statements. These items result in permanent differences between pretax income and taxable income. (Module 24.4, LOS 24.f)

Question 43

Clement Company has revalued an intangible asset with an indefinite life upward by €25 million. In its financial statements, Clement will most likely:

Answer 43

Indefinite life asset are not amortized. When asset is revalued upwards, it will not affect Net Income, it will go directly to OCI. It will affect asset and shareholder's equity. For firms that revalue assets upward, IFRS requires disclosure of the date the asset was revalued, how management determined its fair value, the asset's carrying value using the historical cost model, and (for intangible assets) whether the asset's useful life is finite or indefinite. Although assets and shareholders' equity will increase as a result of the revaluation, net income will not increase. The increase in the value of the asset is reported as a revaluation surplus in shareholders' equity. Amortization expense will not increase because indefinite-lived intangible assets are not amortized. (Module 23.4, LOS 23.l)

Question 44

Review question 82

Question 45

Cluster Sampling Vs Stratified Random Sampling

Answer 45

The procedure described is an example of two-stage cluster sampling. With stratified random sampling, all subsets of the data (all states) would be included, and random samples would be selected from each. Convenience sampling is based on the low cost or easy availability of the data used.

Question 46

In a period of rising prices, management of a company that reports under IFRS is least likely to attempt to influence analysts' opinions of its financial results by:

Answer 46

During periods of rising prices, liquidating inventory is a potential way for companies that use the LIFO inventory cost method to report higher current-period earnings, but LIFO is not permitted under IFRS. Managers attempting to influence analysts' opinions may manipulate accounting assumptions or emphasize non-GAAP measures in their financial reports. (Module 26.3, LOS 26.i)

Question 47

Which is the correct test statistic for a test of the null hypothesis that a population variance is equal to a chosen value?

Answer 47

This is a test of the value of a single variance and is based on a test statistic with a performed via the chi-square distribution. (Module 6.4, LOS 6.j)

Question 48

Yamaska Mining issued a 5-year, $50 million face, 6% semiannual bond when market interest rates were 7%. The market yield of the bonds was 8% at the beginning of the next year. Using the effective interest rate method, what is the initial balance sheet liability, and what is the interest expense that the company should report for the first half of the second year of the bond's life (the third semiannual period)?

Answer 48

This is a discount bond since the market interest rate at issuance exceeds the coupon rate. The initial liability is equal to the proceeds received when the bond was issued. We can find this amount from the following calculation: FV = 50,000,000; N = 10; I = 3.5; PMT = 1,500,000; CPT → PV = $47,920,848.67. Change N to 8 and calculate PV to get liability value at the beginning of the second year of the bond's life, 48,281,511. Interest expense for the next semiannual period is 48,281,511(0.035) = $1,689,853. The subsequent change in the market rate has no effect on the amortization of the discount. (Module 25.2, LOS 25.b)

Question 49

A financial firm employs machine learning to model its risk exposures. The machine identifies a number of risk relationships in the input data, but the firm's management believes some of these relationships are spurious. If so, it is most likely that the model:

Answer 49

Spurious relationships and patterns are likely to result from overfitting, which describes a model that is too complex and treats noise as true parameters. (Module 68.1, LOS 68.c) Overfitting occurs when the machine learns the input and output data too exactly, treats noise as true parameters, and identifies spurious patterns and relationships. Underfitting occurs when the machine fails to identify actual patterns and relationships, treating true parameters as noise. This means the model is not complex enough to describe the data. A further challenge with machine learning is that its results can be a "black box," producing outcomes based on relationships that are not readily explainable.

Question 50

On average, which of the following types of investors has the shortest investment horizon?

Answer 50

Property and casualty insurers may need to distribute funds at any time if a disaster occurs. Endowment funds have a very long horizon, as they are often expected to operate in perpetuity with only annual distributions representing a relatively small percentage of the fund value. Defined benefit plans have an investment horizon based on the years to retirement of currently covered workers and the years they (and their beneficiaries) are expected to live after retirement. (Module 61.1, LOS 61.b)

Question 51

Endowments vs Defined Benefit Pensions Vs Banks

Answer 51

They both have High risk tolerance, long investment horizon, low liquidity needs. Their income needs are different. For endowments, it is based on spending level while for defined benefit pensions, it is based on age. Banks are the opposite of endowments and defined benefit pensions. Banks typically need to maintain excess reserves in order to meet regulatory requirements. As a result, a bank must invest in assets that are more conservative than those invested by other types of financial institutions.

Question 52

The type of short-term financing for which the financing cost is most closely tied to the creditworthiness of a firm's customers is:

Answer 52

Factoring refers to the sale of receivables without recourse; that is, the risk that the firm's customers will not pay, or will not pay in a timely manner, is borne by the factor, who purchases the receivables. Thus, the amount the factor will pay per dollar of receivables is lower (higher discount or interest rate) if the credit quality of the firm's credit customers is lower. The cost of issuing commercial paper or borrowing on a line of credit is more closely tied to the creditworthiness of the borrowing firm itself. (Module 32.1, LOS 32.a)

Question 53

The type of short-term financing for which the financing cost is most closely tied to the creditworthiness of a firm's customers is:

Answer 53

Be careful with the word "credit worthiness of customer" not company Factoring refers to the sale of receivables without recourse; that is, the risk that the firm's customers will not pay, or will not pay in a timely manner, is borne by the factor, who purchases the receivables. Thus, the amount the factor will pay per dollar of receivables is lower (higher discount or interest rate) if the credit quality of the firm's credit customers is lower. The cost of issuing commercial paper or borrowing on a line of credit is more closely tied to the creditworthiness of the borrowing firm itself. (Module 32.1, LOS 32.a) Factoring: selling the receivable at a discount value (usually 90% of the face value) without a recourse. For the buyer of the factor, the risk is in the firm's customers (the party that owes the money to the factor seller) that will default or not pay in a timely manner.

Question 54

A distinction between cognitive errors and emotional biases is that cognitive errors:

Answer 54

While an investment advisor might have success in mitigating cognitive errors through educating clients, emotional biases are more difficult to overcome and may need to be accommodated. Processing errors and belief perseverance both describe cognitive errors. (Belief perseverance is not emotional error) There is no support for the idea that cognitive errors typically lead to errors of commission while emotional biases typically lead to errors of omission. (Module 65.1, LOS 65.a)

Question 55

Which of the following investments is least likely to be evaluated using traditional capital allocation analysis? Investing:

Answer 55

In capital allocation analysis, the decision are based on cash flows. It takes into account how hard it will be to estimate the cash flow generation. Some research and development projects may involve such a high degree of risk that they are very difficult to evaluate using traditional capital budgeting methods. Replacement projects and mandatory environmental projects can typically be evaluated with the usual capital budgeting techniques. (Module 31.1, LOS 31.b)

Question 56

In a country where interest is a tax-deductible expense, an increase in a company's marginal tax rate would most likely cause the company to:

Answer 56

The companies generally wants to become more profitable by reducing their WACC. An increase in a company's tax rate, other things equal, will decrease its after-tax cost of debt, which will lead to an increase in the debt percentage in its optimal capital structure. While increased taxes will reduce net income, it will not necessarily lead to a reduction in dividends. (Module 33.1, LOS 33.b) WACC = (wd)[kd(1 − t)] +(wps)(kps) + (wce)(kce)

Question 57

Which of the following project analysis decisions most likely represents a common capital allocation pitfall?

Answer 57

Only incremental overhead costs related to a project should be included in the analysis. 'Having a standard allocation cost across projects might misrepresent the return over investment for individual projects. ' Comparing mutually exclusive projects based on NPV is appropriate (and choosing the highest NPV), as is incorporating competitors' expected economic responses into the project analysis. (Module 31.3, LOS 31.d)

Question 58

Open-end mutual funds differ from closed-end funds in that:

Answer 58

Open-end funds redeem existing shares or issue new shares in accordance with investor demand. Closed-end fund shares are fixed in number and trade on exchanges as though they were common stock. (Module 61.2, LOS 61.f)

Question 59

Analysts typically consider a company's interest coverage ratio and debt-to-EBITDA to be a warning about its ability to repay debt if the ratio is:

Answer 59

Leverage and coverage ratios are key for analyzing debt capacity. For example, many analysts consider it a warning sign if a company's debt-to-EBITDA ratio is greater than three or if its interest coverage ratio is less than two. Interest Coverage ratio = EBIT / Interest Payment (better to have lower interest payment -> lower default risk) Debt / EBITDA

Question 60

Timely Taxis, Ltd. has signed a long-term lease for 20 underground parking spots at $150 each per month for its fleet of taxis. The firm currently has 18 taxis in operation and is performing an NPV analysis on the purchase of a 19th taxi. The cost of parking for the 19th taxi is best described as:

Answer 60

The 19th space is neither an incremental cost, nor an opportunity cost or a type of cannibalization. It is a sunk cost since the firm has already committed to parking for 20 taxis. The cost of the 19th parking space is not directly relevant to the capital allocation decision. (Module 31.1, LOS 31.b) It is not a incremental cost because the cash flow will not change by with the 19th space. It is not a cannibalization because adding a new space is not replacing another space.

Question 61

Consider three firms of approximately equal size: Brinde is a retailer that owns its shops and sells primarily on credit. Enbird is a regional airline that leases its aircraft and service facilities. Ribden is a magazine publisher that takes advance payments for subscriptions. Based only on this information, which of these firms is likely to have the greatest capital needs?

Answer 61

Other things equal, a firm that owns its assets and extends credit to customers will have a greater need for capital compared to firms that operate using an asset-light model (Enbird) or a pay-in-advance model (Ribden). (Module 30.1, LOS 30.b)

Question 62

Appeal, Inc. has sold only one bond issue, $10 million face value of 20-year debt that pays annual interest at a rate of 6%, at a YTM of 6.5%. Appeal's management is evaluating a project that would require the issuance of another $10 million face value of debt. If the new bond has a 7.0% coupon and can be sold with a YTM of 7.5%, the pre-tax cost of debt that Appeal's management should use in evaluating the project is:

Answer 62

Answer: 7.5% The appropriate pre-tax cost of debt is the required yield on newly issued debt to be issued. (Module 33.1, LOS 33.c)

Question 63

Types of real options:

Answer 63

Timing options allow a company to delay making an investment because they expect to have better information in the future. Abandonment options are similar to put options (the option to sell an asset at a given price in the future). They allow management to abandon a project if the present value of the incremental cash flows from exiting a project exceeds the present value of the incremental cash flows from continuing the project. Expansion options are similar to call options (the option to buy an asset at a given price in the future). Expansion options allow a company to make additional investments in future projects if the company decides they will create value. Flexibility options give managers choices regarding the operational aspects of a project. The two main forms are price-setting and production flexibility options. Fundamental options are projects that are options themselves because the payoffs depend on the price of an underlying asset. For example, the payoff for a copper mine is dependent on the market price for copper. If copper prices are low, it may not make sense to open a copper mine, but if copper prices are high, opening the copper mine could be very profitable. The operator has the option to close the mine when prices are low and open it when prices are high.

Question 64

A principal-agent conflict is most likely to occur between:

Answer 64

conflict between owners and managers. The principals in a corporation are the shareholders who own the firm. The principal-agent conflict occurs because the interests of shareholders often conflict with the incentives of board members or senior managers. The other answer choices do not involve the principals (owners) of the company.(Module 29.1, LOS 29.b)

Question 65

In the absence of stated capital structure weights, an analyst must estimate a firm's target capital structure. Alternatives for estimating target capital structure include the following:

Answer 65

An analyst may simply use the firm's current capital structure (based on market values) as the best indication of its target capital structure. "Not book value" Book value is the net value of a firm's assets minus its liabilities. It is the amount of money shareholders would receive if the company was liquidated. Market value is the company's worth based on the total value of its outstanding shares in the market. It is the price of a share of its stock multiplied by the number of outstanding shares.

Question 66

In a derivatives contract that is subject to novation:

Answer 66

Novation refers to a central clearinghouse taking the opposite positions to both counterparties. (Module 48.1, LOS 48.b)

Question 67

Convenience yield:

Answer 67

Convenience yield is the value of a physical commodity being available for use over the period of a forward contract. (Module 51.1, LOS 51.b)

Question 68

An analyst determines that a company has a return on equity of 16% and pays 40% of its earnings in dividends. If the firm recently paid a $1.50 dividend and the stock is selling for $40, what is the required rate of return on the stock if it is priced according to the dividend discount model?

Answer 68

Question 124 Explanation g = (1 − payout)(ROE) = (1 − 0.40)(16%) = 9.6% k = (1.5 * 1.096) / 40 + 0.096 = 13.7% (Module 41.2, LOS 41.h)

Question 69

A securities market exhibits operational efficiency if it offers:

Answer 69

Operational efficiency refers to low transactions costs in a securities market. Informational efficiency means prices change rapidly to reflect new information without predictable bias and rates of return are, on average, proportional to risk. (Module 36.3, LOS 36.k)

Question 70

Co-investing is most accurately described as investing:

Answer 70

" Co" related to "joint" or "together" Co-investing refers to investing in a fund as a limited partner, while additionally investing directly in some of the assets in which the fund invests. (Module 58.1, LOS 58.b)

Question 71

An investor buys a stock for $50. The initial margin requirement is 50%, and the maintenance margin requirement is 25%. The price below which the investor would receive a margin call would be:

Answer 71

Can use the formula to solve this questions "1 - IMMM"

Question 72

Pat McCoy is analyzing a technology firm that has experienced annual earnings growth of 12%. McCoy does not expect the firm to begin paying dividends on its common shares in the foreseeable future. To estimate the value of this firm's common shares, McCoy should most appropriately use: A) a two-stage DDM. Incorrect Answer B) a free cash flow model. Correct Answer C) a Gordon growth model.

Answer 72

Free cash flow-based valuation techniques are appropriate for valuing shares of a firm that does not pay dividends. The Gordon growth model and two-stage dividend discount model are appropriate for valuing shares of dividend-paying firms. (Module 41.2, LOS 41.i) FCFE = cash flow from operations − FCInv + net borrowing

Question 73

The type of credit risk that is most directly reflected in a bond's rating is:

Answer 73

Default risk is the possibility that the issuer will fail to meet its obligations under the indenture, for which investors demand a premium above the return on a default-risk-free security. Bond ratings indicate default risk. Downgrade risk is the risk that a bond will be reclassified as a riskier security by a credit rating agency. Credit spread risk is the risk that the default risk premium on a bond can increase. (Module 47.1, LOS 47.e)

Question 74

Question 133 about Waterfall structure

Question 75

A stock index consists of two stocks. As of January 1: - Company A has 50 shares outstanding valued at $2 each. - Company B has 10 shares outstanding valued at $10 each. - The price-weighted index is 6, and the value-weighted index is 100. On June 30, the price of Company A's stock has increased to $4 per share. Effective the morning of July 1, Company B's stock splits two- for-one and is priced at $5. The opening values of the price-weighted index and the value-weighted index on July 1 are:

Answer 75

Price-weighted index = Sum of stock prices / # of stocks in the index (use the before split price; price-weighted index is not affected by the split) (market capitalization-weighted index) Value-weighted index = Sum of weighted stock price at current date / Sum of weighted stock price at base date * 100 Question 134 Final answer: price weighted 7 and value weighted 150  

Question 76

A firm is said to have a top-heavy capital structure if a high percentage of its total capital is:

Answer 76

"Top-heavy" refers to a capital structure that includes a high percentage of secured bank debt in its borrowing. Secured debt is type of debt that is backed by collateral. A firm with a top-heavy capital structure may be limited in its access to additional bank borrowing, which increases the likelihood of default if the firm encounters financial distress. (Module 47.2, LOS 47.j) "If the company default on its debt, the secured debts will be one of the first to receive its claims based on the pecking order. Due to this factor, it might be less appealing for other investors to invest in top-heavy companies."

Question 77

A bond with nine years to maturity is quoted at an interpolated spread of +150 basis points. The benchmark yield for this bond is:

Answer 77

Interpolated spreads (I-spreads) are spreads benchmarking against swap rates. (Module 44.5, LOS 44.k) Other types of spread benchmarking: - G-spread (yield spread over a government bond) - Z-spread (zero-volatility spread) - option-adjusted spread (OAS) is used for bonds with embedded options

Question 78

An investor purchases 1,000 shares of each of the stocks in a price-weighted index at their closing prices (ignore transactions costs). On a total return basis, if the index stocks remain the same, this portfolio will most likely: A) perform exactly like the index over time. B) outperform the index over time. C) underperform the index over time.

Answer 78

B) outperform the index over time. Total return includes dividend yield. Because dividends are not included in the performance of the index itself, the portfolio will outperform the index by the amount of the dividend yield. (Module 37.1, LOS 37.b)

Question 79

Understand the differences between A) a Gordon growth model. B) an asset-based valuation model. C) an enterprise value multiplier model.

Question 80

Cumulative preferred shares:

Answer 80

Cumulative preferred shares stipulate that all preferred dividends must be paid before common stock dividends can be paid. (Module 39.1, LOS 39.a)

Question 81

A leveraged buyout firm that carries out a secondary sale has:

Answer 81

The secondary sale is a exit strategy by the private equity. In a secondary sale, a private equity firm sells one of its portfolio companies to a group of investors or another private equity firm. (Module 60.1, LOS 60.a) "Leveraged" refers to the fact that the fund's purchase of the portfolio company is funded primarily by debt. When a private equity fund acquires a publicly traded company in an LBO, the company is said to be "going private."

Question 82

Private equity exit strategies

Answer 82

- Trade sale. Sell a portfolio company to a competitor or another strategic buyer. - IPO. Sell all or some shares of a portfolio company to the public. - Recapitalization. The company issues debt to fund a dividend distribution to equity holders (the fund). This is not an exit, in that the fund still controls the company, but is often a step toward an exit. - Secondary sale. Sell a portfolio company to another private equity firm or a group of investors. - Write-off/liquidation. Reassess and adjust to take losses from an unsuccessful outcome.

Question 83

A 10-year note issued by Gaullic Finance will be paid from a bankruptcy-remote pool of Gaullic's balance sheet assets. These notes are best described as:

Answer 83

Covered bonds vs ABS Covered bonds provide recourse to the issuing firm. Securitized bonds (eg. ABS) only provide recourse to the special purpose entity. Covered bonds are an obligation of the corporation that issues them, but their interest and principal payments are provided by a pool of assets that are legally recognized as bankruptcy remote. They are different from securitized bonds (i.e., asset-backed securities), which are issued by a special purpose entity to which the underlying assets are sold. (Module 45.1, LOS 45.b)

Question 84

Returns calculated from which type of real estate index are most likely to have the lowest standard deviation? A) REIT index. B) Appraisal index. C) Repeat sales index.

Answer 84

REIT index: Actual trading prices Appraisal index: Smooth returns; understate volatility (correct) Repeat sales index: may not be random, can present sample selection bias; can lead to more volatility (based on price changes for properties that have sold multiple times)

Question 85

The type of equity depository receipt that gives its owners the right to vote and receive dividends from a company's shares is best described as: A) a global depository receipt. Incorrect Answer B) a sponsored depository receipt. Correct Answer C) a fully-owned depository receipt.

Answer 85

The owner of a sponsored DR share has the same voting rights and receives the same dividends as the owner of a common share of the firm. With an unsponsored DR, the depository bank retains the voting rights. A global depository receipt may be sponsored or unsponsored. (Module 39.2, LOS 39.d) Depository receipts (DRs) represent ownership in a foreign firm and are traded in the markets of other countries in local market currencies. A bank deposits shares of the foreign firm and then issues receipts representing ownership of a specific number of the foreign shares. The depository bank acts as a custodian and manages dividends, stock splits, and other events.

Question 86

Consider the following Treasury spot rates expressed as bond equivalent yields: Maturity Spot Rate 6 months 3.0% 1 year 3.5% 1.5 years 4.0% 2 years 4.5% If a Treasury note with two years remaining to maturity has a 5% semiannual coupon and is priced at $1,008, the note is:

Answer 86

have to calculate the PV of the cash flows with different spot rates.

Question 87

An increase in the risk-free rate, together with an increase in the expected volatility of the price of the underlying asset, will most likely lead to a gain for a: answer: long call option.

Answer 87

One way to remember the effects of changes in the risk-free rate is to think about present values of the payments for calls and puts. These statements are strictly true only for in-the-money options, but it's a way to remember the relationships. The holder of a call option will pay in the future to exercise a call option and the present value of that payment is lower when the risk-free rate is higher, so a higher risk-free rate increases a call option's value. The holder of a put option will receive a payment in the future when the put is exercised and an increase in the risk-free rate decreases the present value of this payment, so a higher risk-free rate decreases a put option's value.

Question 88

Sinking fund provisions:

Answer 88

Sinking fund provisions provide for the repayment of principal of the bond before the maturity date. Sinking fund provisions offer both advantages and disadvantages to bondholders. On the plus side, bonds with a sinking fund provision have less credit risk because the periodic redemptions reduce the total amount of principal to be repaid at maturity. The presence of a sinking fund, however, can be a disadvantage to bondholders when interest rates fall. Has higher reinvestment risk. This disadvantage to bondholders can be seen by considering the case where interest rates have fallen since bond issuance, so the bonds are trading at a price above the sinking fund redemption price. In this case, the bond trustee will select outstanding bonds for redemption randomly. A bondholder would suffer a loss if her bonds were selected to be redeemed at a price below the current market price. This means the bonds have more reinvestment risk because bondholders who have their bonds redeemed can only reinvest the funds at the new, lower yield (assuming they buy bonds of similar risk).

Question 89

The type of equity index most likely to require rebalancing is:

Answer 89

The individual security weights in an equal-weighted index must be rebalanced periodically to restore equal weights as security prices change over time. The weights in a price-weighted index are determined by securities prices. Market capitalization-weighted indexes are self-adjusting to a large extent. (Module 37.2, LOS 37.i)

Question 90

Consider a collateralized mortgage obligation (CMO) structure with one planned amortization class (PAC) class and one support tranche outstanding. If the prepayment speed is higher than the upper collar on the PAC:

Answer 90

Answer: the life of the support tranche will decrease. If the prepayment speed is higher than the PAC collar, the support tranche receives more prepayments. The life of the support tranche will shorten. The PAC tranche could receive higher prepayments if the support tranche principal is fully repaid (i.e., a broken PAC). In this case, the support tranche is still outstanding, which means that hasn't happened yet. (Module 45.1, LOS 45.f) "The tranches and PAC are created because each investor have different tolerance of prepayment risk. "

Question 91

The change in the intrinsic value of a firm's common stock resulting from an increase in ROE most likely:

Answer 91

While an increase in a firm's ROE due to a sharp increase in earnings will, if unexpected, lead to an increase in the intrinsic value of its shares, an increase in a firm's ROE due to the repurchase of stock with debt will not necessarily increase the intrinsic value of the firm's shares, as any increase in ROE may be offset by an increase in the risk inherent in the firm's shares. (Module 39.2, LOS 39.h) intrinsic value of a firm's shares is the discounted present value of its future cash flows an increase (decrease) in the required return (WACC) used to discount future cash flows will decrease (increase) intrinsic value.

Question 92

A public offering of bonds issued over a period of time is most accurately described as: A) a serial structure. Incorrect Answer B) a shelf registration. Correct Answer C) a waterfall structure.

Answer 92

In a shelf registration, an entire issue is registered with securities regulators but the bonds are sold to the public over a period of time as the issuer needs to raise funds. In a serial bond issue, bonds with multiple maturity dates are issued at the same time. A waterfall structure is issued in tranches with differing priority of claims. (Module 43.2, LOS 43.g)

Question 93

A hedge fund uses derivative positions to take a long position in the Japanese yen and a short position in the euro. The classification of this hedge fund is most likely: A) an event-driven fund. Incorrect Answer B) a macro strategy fund. Correct Answer C) a quantitative directional fund.

Answer 93

Macro strategy funds invest based on expected shifts of global economies, primarily in currency and interest rate derivatives. Quantitative directional funds take long and short positions in equities based on technical analysis. Event-driven funds seek to profit from investment strategies based on specific corporate events and one-time transactions. (Module 60.3, LOS 60.f)

Question 94

ompared to an index of 100 U.S. exchange-traded stocks, an index of 100 U.S. government and corporate bonds will most likely: A) reflect equally timely price data. Incorrect Answer B) be more difficult to build and maintain. Correct Answer C) have less turnover among the securities in the index.

Answer 94

Bond indexes are more difficult to build and maintain than stock indexes for several reasons. Bonds in an index have to be replaced as they mature, so turnover is likely to be greater in a bond index than in a stock index. Many bonds lack the continuous trade data that exists for exchange-traded equities. (Module 37.2, LOS 37.j)

Question 95

The minimum data required to calculate the implied forward rate for three years beginning three years from now is:

Answer 95

the 3-year and 6-year spot rates. Correct Answer B) the 4-year, 5-year, and 6-year spot rates. Incorrect Answer C) spot rates at 1-year intervals for the 6-year period.

Question 96

An industry in the growth phase of the industry life cycle is most likely to experience:

Answer 96

An industry in the growth stage is usually characterized by increasing profitability, decreasing prices, and a low degree of competition among competitors. (Module 40.2, LOS 40.i) 'not increasing price'

Question 97

Which of the following provisions is least likely to benefit the limited partners in a private equity fund? A) High hurdle rate. Incorrect Answer B) Catch-up clause. Correct Answer C) Whole-of-fund waterfall structure.

Answer 97

Catch-up clauses benefit the general partners, allowing them to collect all gains after the hurdle rate is met until they have collected their specified incentive percentage of the initial gains. A high hurdle rate benefits the limited partners because they do not pay incentive fees until the hurdle rate is met. A whole-of-fund waterfall structure is more favorable to limited partners than a deal-by-deal waterfall structure. (Module 58.1, LOS 58.c)

Question 98

Consider an investor who has sold a cash-settled call option at $39 on 100 shares of General Industry at a price of $5. If the share price is $41 at expiration, the investor will have a: A) loss of $300. Incorrect Answer B) profit of $300. Correct Answer C) payoff of $300. Incorrect Answer

Answer 98

The investor will receive $500 from the sale of the call and must pay 100 × (39 – 41) = –$200 at expiration for a profit of $300. (Module 49.2, LOS 49.b) The payoff was 200 dollars. The sale was 500 dollars.

Question 99

Acquire Corp. has a business model based on making accretive acquisitions each year. The company has historically been successful in implementing its strategy. Earnings per share have grown each of the last five years at a 15% compounded rate. Acquire's two primary business segments are engineering construction and mining. During the past year, Acquire purchased a services company with large net operating losses. The purchase price was one-half the company's current market value. The most appropriate technique to value Acquire is based on its:

Answer 99

The new acquisition has likely changed the nature of Acquire's business so that historical information is not as relevant to the investment decision-making process. The most appropriate earnings multiple for analyzing Acquire is the forward price-to-earnings ratio. (Module 41.3, LOS 41.j) fundamentals change after the acquisition, so historical data is not too relevant anymore

Question 100

A 60-day forward rate agreement (FRA) on a 60-day market reference rate has a fixed rate of 6%. If, at the initiation of the contract, the market reference rate is 5%, the payment in 60 days:

Answer 100

The payment on an FRA is unknown until the settlement date of the forward, when the future 60-day market reference rate is known. (Module 52.1, LOS 52.b)

Question 101

A characteristic of alternative investments that distinguishes them from traditional investments is that: A) redemptions are more restricted. Correct Answer B) they are subject to stricter regulations. Incorrect Answer C) managers hold more diversified portfolios.

Answer 101

Greater restrictions on investor redemptions are a characteristic of alternative investments. Alternative investments are less regulated than traditional investments and managers tend to hold more concentrated portfolios. (Module 58.1, LOS 58.a)

Question 102

A 3-year, 6% coupon, semiannual-pay note has a yield to maturity of 5.5%. If an investor holds this note to maturity and earns a 4.5% return on reinvested coupon income, his realized yield on the note is closest to: A) 5.46%. Correct Answer B) 5.57%. Incorrect Answer C) 5.68%.

Answer 102

This question does not require calculations. Because the return on reinvested coupon interest is less than the note's yield to maturity, the investor's realized yield on the note must be less than the YTM. Only Choice A can be correct. (Module 46.1, LOS 46.a) Realized yield = YTM if reinvestment income also earns YTM

Question 103

Liquidity is generally supplied by dealers in: A) a brokered market. Incorrect Answer B) an order-driven market. Incorrect Answer C) a quote-driven market. Correct Answer

Answer 103

Liquidity is generally supplied by dealers in a quote-driven market, by other traders in an order-driven market, and by brokers (who arrange the trades) and traders in a brokered market. (Module 36.3, LOS 36.j) a brokered market. -> broker will counterparty to intermediate a trade of something that is usually harder to sell (there is no real active market, e.g., real estate) an order-driven market. -> traders in exchange in automated trading systems Incorrect Answer C) a quote-driven market. -> dealers maintain a inventory of securities and provide liquidity to the quote driven market