Mock Exams I messed up May Version

Question 1

fixed-charges coverage ratio formula

Answer 1

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

Question 2

In a set of common-size financial statements, unearned revenue should most likely be calculated as a percentage of:

A
sales.

B
assets.

C
liabilities.

Answer 2

B
assets.

Unearned revenue is created when a company receives payment for goods and services that have not been delivered yet. This amount is reported as a liability on the balance sheet.

Like all other liability accounts in a common-size balance sheet analysis, unearned revenue should be calculated as a percentage of total assets.

Question 3

All else equal, which of the following accounting choice will most likely increase a company’s reported earnings during the current accounting period?

A
Increasing the provision for doubtful accounts

B
Increasing the salvage value of assets depreciated using the straight-line method

C
Switching from the FIFO method to the LIFO method in an inflationary environment

Answer 3

B
Increasing the salvage value of assets depreciated using the straight-line method

increasing the salvage value of an asset will decrease the depreciation expense each period under the straight-line method.

Question 4

The loss on sale of equipment would most likely be reflected as an adjustment to which category in an indirect-format cash flow statement?

A
Investing Activity

B
Financing Activity

C
Operating Activity

Answer 4

C
Operating Activity

When using the indirect method to calculate CFO, adjustments must be made for any items that are reflected in net income without having affected operating cash flows.

In this example, the amount of any loss on the sale of equipment, which is a non-operating activity, has reduced net income and must be added back in order to arrive at CFO. Under the indirect method, this adjustment is made in the operating activities section of the cash flow statement.

Question 5

Which of the following is least likely to be included in the portion of a corporate bond’s yield that reflects investors’ time preferences for current versus future nominal consumption?

A
Inflation premium

B
Liquidity premium

C
Real risk-free rate

Answer 5

B
Liquidity premium

Investors’ time preferences for current versus future real consumption are captured by the real risk-free rate. Adding an inflation premium produces a rate that reflects the tradeoff between current and future consumption in nominal terms.

The liquidity premium component of a corporate bond’s yield reflects compensation for the discount to market value that investors expect to incur in order to quickly convert their position into cash. By contrast, newly-issued government securities typically do not carry a liquidity premium due to the large number of investors who are active in the government bond market and are willing to pay the current market value.

Question 6

DuPont ROE formula

Answer 6

ROE = Tax Burden * Interest Burden * EBIT Margin * Total Asset Turnover * Leverage

Question 7

If stock market returns are small and positive but interspersed with occasional large negative returns, the market most accurately described as being:

A
leptokurtic.

B
mesokurtic.

C
negatively skewed.

Answer 7

C
negatively skewed.

This is an example of negative skewness. If there were instead frequent small losses and a few extreme gains, the distribution would be positively skewed.

Question 8

The primary objective of the World Bank is most likely to:

A
ensure the stability of the international payment system.

B
address poverty in countries with developing economies.

C
provide a forum and framework for international trade negotiations

Answer 8

B
address poverty in countries with developing economies.

The primary objective of the World Bank is to assist countries with developing economies in their efforts to eradicate poverty.

Question 9

Brian Gilman, CFA, has been asked to write a research report on Kennemetal, a major copper mining firm in which Gilman’s wife owns 750 shares. Which of the following statements is most accurate? Gilman:

A
must refuse to write the report on a company in which his wife owns shares.

B
may accept the assignment, but must disclose his wife’s stock ownership in the report.

C
may accept the assignment and is not required to disclose his wife’s stock ownership in the report.

Answer 9

B
may accept the assignment, but must disclose his wife’s stock ownership in the report.

Standard VI(A) - Disclosure of Conflicts requires members and candidates to “make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their client, prospective clients, and employer.” In this example, Gilman is not required to refuse this assignment, but he must disclose his wife’s ownership of the company’s stock if he chooses to accept it.

Question 10

Last year, SparTech was an all-equity firm. After raising capital to finance an expansion, the company’s capital structure is currently 40% debt and 60% equity. Which of the following statements is most accurate? SparTech’s capital structure:

A
is currently simple, but would be complex if the company issued preferred stock.

B
was simple, but became complex when the company ceased being an all-equity firm.

C
is currently simple, but would be complex if the company began issuing employee stock options.

Answer 10

C
is currently simple, but would be complex if the company began issuing employee stock options.

A capital structure is considered to be complex when a company has issued convertible securities such as warrants, convertible bonds, and employee stock options.

A mix of debt and equity is considered a simple capital structure. In this example, adding preferred stock to the current capital structure, provided that it is not convertible, would not make it complex.

Question 11

IFRS-compliant companies are least likely required to disclose which of the following for their intangible assets?

A
Fair value

B
Amortization method

C
Whether the useful lives are indefinite or finite

Answer 11

A
Fair value

Under IFRS, for intangible assets, a company must disclose whether the useful lives are indefinite or finite.

If an asset is deemed to have an indefinite life, the company must disclose the reasons for this judgment as well as the asset’s carrying value.

For intangible assets with finite useful lives, for each class of intangible asset, the company must disclose:

Estimated useful lives

Amortization methods

Gross carrying amount

Accumulated amortization at the beginning and end of the period, where amortization is included on the income statement

A reconciliation of the carrying amount at the beginning and end of the period

Question 12

Nathan Bradley, CFA, an independent equity analyst, accepts an offer from Whitten Manufacturing (WMN) to write a research report analyzing the company’s stock. Before undertaking any work on the report, Bradley agrees to accept a flat fee and a fixed number of WMN stock options as compensation. Neither the value of the fee or the number of options Bradley receives is linked to his report’s conclusions or recommendations. One year after the report is issued, Bradley exercises the options. Has Bradley most likely violated the Standards?

A
No

B
Yes, with respect to independence and objectivity only

C
Yes, with respect to both independence and objectivity and additional compensation arrangments

Answer 12

B
Yes, with respect to independence and objectivity only

Issuer-paid research, such as the work described in this example, is allowed by Standard I(B) - Independence and Objectivity under certain conditions. Bradley would not have violated this Standard by accepting a flat fee that was agreed in advance of him undertaking any work and was not linked to his report’s conclusions or recommendations. However, Bradley does violate this Standard by accepting a compensation package that includes options to purchase WMN shares as this type of equity-based compensation could reasonably be expected to influence his ability to remain independent and objective. Bradly will likely be biased to release a positive report as that will increase the value of his stock options of WMN.

There is no indication that Bradley has violated Standard IV(B) - Additional Compensation Arrangements, which prohibits members and candidates from accepting compensation for work that conflicts with the interest of their employer without receiving written consent from all parties involved.

Question 13

An analyst gathers the following information with respect to the machine used by a company that issues financial statements in accordance with US GAAP.

Undiscounted expected future cash flows $21,000

Present value of expected future cash flows $18,000

Fair value
$19,000

Estimated selling cost
$3,000

The company is currently carrying this asset at $20,000. Based on the information presented above, the company will most likely:

A
continue carrying this asset at $20,000.

B
revise the carrying value of this asset down to $16,000.

C
revise the carrying value of this asset down to $18,000.

Answer 13

A
continue carrying this asset at $20,000.

According to US GAAP, an asset’s carrying amount is considered to be recoverable if it is less than the undiscounted value of expected future cash flows. In this example, the company would continue to carry this asset at $20,000 because this amount is less than the $21,000 value of undiscounted expected future cash flows.

Question 14

cost of trade credit

Answer 14

(1 + Discount / (1 - Discount))^(365/Days Beyond DIscount Period) - 1

Question 15

DRB Construction purchased a fixed asset worth $4,000 at the beginning of the year. The company records a $600 depreciation expense attributable to this asset on its income statement for the first year of ownership. For tax purposes, DRB is allowed to depreciate 25% of the asset each year. The asset’s tax base after one year is closest to:

A
$1,000.

B
$3,000.

C
$3,400.

Answer 15

B
$3,000.

The tax base of an asset is the amount that will be deductible for tax purposes in future periods. This is equal to the purchase price of the asset minus the depreciation allowed for tax purposes for the year. In this example, the tax base is:

$4,000 - 25% * $4,000 = $3,000

Question 16

correlation formula between two stocks

Answer 16

COV A, B = E [(A - E(A)) * (B - E(B))]

correlation = COV / (standard dev A * standard dev B)

Question 17

Carla Pollini, CFA, is responsible for recommending third-party managers for a defined benefit pension plan. While reviewing several proposals for the plan’s latest allocation, Pollini learns that Roberto Lacobucci, manager of the Eurasian Equity Fund, directs a percentage of the fund’s profits to an animal sanctuary. After concluding her review of several funds, Pollini recommends that the plan’s trustees choose the Eurasian Equity Fund. Her methodology for ranking the various proposals includes consideration of each fund’s commitment to environmental, social, and governance (ESG) factors.

Pollini does not disclose to the trustees that she made a personal donation to the animal sanctuary that is supported by the Eurasia Equity Fund. Has Pollini most likely violated the Standards?

A
No

B
Yes, with respect to disclosure of conflicts

C
Yes, with respect to both disclosure of conflicts and independence and objectivity

Answer 17

A
No

ollini would have violated Standard I(B) - Independence and Objectivity if she had solicited a donation from Lacobucci for one of her preferred charities when deciding whether to recommend his fund to the pension plan’s trustees. However, she does not compromise her independence or objectivity by making a personal donation to a charity that she learned about while conducting due diligence as part of her professional responsibilities. Even if Lacobucci had solicited the donation, and there’s no evidence that he did, Pollini would not violate the Standards by making a donation because she would not be using her position as the person responsible for recommending funds to benefit personally.

Neither has Pollini violated Standard VI(A) - Disclosure of Conflicts. The fact that she has decided to personally support the same charity as Lacobucci is not something that could reasonably be expected to impair her independence and objectivity.

Question 18

Harmonic mean formula

Answer 18

1 / (((1/x1) + 1/(x2) + 1/(x3)) / n)

Question 19

Free Cash Flow to Firm formula

Answer 19

NI + Depreciation + Debt Repayment * (1 - tax rate) - FC Inv - WC Inv

FC Inv = Fixed capital investment

WC Inc = Working Capital Investment

Question 20

how to find the days of number payable from the cash conversion cycle

CCC = DOH + DSO - DP

Answer 20

DOH = 365 / Inventory turnover

DSO = 365 / Receivables turnover

Then you find DP form that

Question 21

Marge Varney, CFA, provides retirement planning services for her clients, including Kendra Hodge and Philippe Bourque. Both Hodge and Bourque own 1,000 shares of Philatech Industries (PHI). These positions account for 2% of Hodge’s total wealth and 40% of Bourque’s. After scrutinizing the company’s latest financial reports, Varney becomes convinced that PHI will underperform over the next 5 years. She e-mails both Hodge and Bourque a copy of a detailed report that she prepared to support her recommendation that they each sell at least 20% of their PHI shares. Within 5 minutes, Bourque replies to Varney’s e-mail, authorizing her to sell 200 PHI shares from his account. A few minutes after that, Hodge replies with the same instructions. Immediately after receiving Hodge’s email, Varney submits sell orders on behalf of both clients’ accounts. Has Varney most likely violated the Standards?

A
No

B
Yes, with respect to fair dealing

C
Yes, with respect to communication with clients and prospective clients

Answer 21

B
Yes, with respect to fair dealing

Standard V(B) - Communication with Clients and Prospective Clients requires members and candidates to use reasonable judgment in identifying which factors are important to their recommendations and include those factors in communications with clients. This creates an obligation to consider each client’s particular circumstances when making recommendations.

In this case, Hodge and Bourque both own 1,000 shares of PHI. However, selling 200 of these shares will have a disproportionately large impact on Bourque’s portfolio. Varney violated this Standard by taking a “one-size-fits-all” approach with two clients who have very different circumstances. At a minimum, Varney should have taken additional time with Bourque to go over the significant impact that this trade would have on his portfolio.

There is no indication that Varney has violate

Question 22

Guy Lapierre, CFA, is an investment advisor who works with individual investors, many of whom require the services of a tax specialist. Lapierre’s colleague, Jeanette Fung, pays Lapierre $1,000 for every referral who becomes one of her clients. In a meeting with his client, Eugene Randolph, Lapierre recommends Fung’s services as a tax specialist, adding, “If you become one of Jeanette’s clients, she will pay me a flat fee in cash for the referral.” Randolph later met with Fung but decided not to become a client of hers. This decision was based in part on his belief that, by paying referral fees, Fung would have to charge excessively high rates for her services. Has Lapierre most likely violated the Standards?

A
Yes

B
No, because Randolph did not become Fung’s client

C
No, because he disclosed that he had a referral fee arrangement with Fung

Answer 22

A
Yes

According to Standard VI(C) - Referral Fees, members and candidates must disclose the nature of any referral fee arrangements to clients, prospective clients, and employers as well as an estimate of the value of the compensation. In this case, Lapierre disclosed the nature of the arrangement (Fung pays him a flat fee in cash when his referrals become her clients), but he did not provide an estimate of the value of the compensation. Such an incomplete disclosure is a violation of this Standard.

Question 23

Under IFRS, a reversal of a prior-year inventory write-down is most likely recorded as:

A
non-operating income.

B
other comprehensive income.

C
a reduction in cost of goods sold.

Answer 23

C
a reduction in cost of goods sold.

Under IFRS, reversals of inventory write-downs are recognized by reducing the cost of goods sold.

Question 24

Charles Telford, CFA, is a research analyst for Edgemont Investments, and one of the companies he covers is Jackson Dynamics (JDN). Knowing that many of Edgemont’s clients own JDN shares, Telford increases his projection of the company’s next quarterly earnings in order to augment their returns. Neither Telford or any members of his immediate family owns any JDN shares and his compensation is unaffected by the returns on clients’ portfolios. Has Telford most likely violated the Standards?

A
No, because he served the clients’ interests

B
Yes, with respect to market manipulation only

C
Yes, with respect to market manipulation and independence and objectivity

Answer 24

B
Yes, with respect to market manipulation only

Telford acted with the intention of artificially manipulating the price of JDN shares, which is a violation of Standard II(B) - Market Manipulation.

There is no indication that Telford violated Standard I(B) - Independence and Objectivity.

Question 25

marginal propensity to save formula

Answer 25

1. find fiscal multiplier FM = 1 / (1 - c * (1 - t)) c = marginal propensioty to consume Fiscal multiplier = Consumer spending / Government Spending 2. find c 3. marginal propensity to save = 1 - c

Question 26

the equation for the forward rate of currency rate

Answer 26

1 + i (domestic) = spot rate (foreign/domestic) * (1 + i (foreign) * (1 / Forward rate (foreign / domestic))

Question 27

On average, firms in an industry carry 45 days of inventory. If a company turns its inventory over 8.7 times per year, its rate of inventory turnover is most likely: A quicker than the industry average and it had more days of inventory. B quicker than the industry average and it has fewer days of inventory. C slower turnover than its average competition and it has more days of inventory.

Answer 27

B quicker than the industry average and it has fewer days of inventory.

Question 28

Autarky and bilateralism are most likely located on the same side of which axis in the geopolitical risk assessment framework? A Nationalism/Globalization B Cooperation/Non-cooperation C Multilateralism/Anti-Globalization

Answer 28

A Nationalism/Globalization While autarky and bilateralism are on opposite sides of the Cooperation/Non-cooperation axis of the geopolitical risk assessment framework, they are located on the same side of Nationalism/Globalization axis. Both models are characterized by resistance to global efforts among large numbers of countries to address areas of common concern.

Question 29

Robert Choi, CFA, works for Challenger Asset Management, which offers its clients ten emerging market equity funds. All ten funds had negative five-year returns, although each has outperformed its benchmark. Choi approves an advertisement that includes a statement that the company's funds have provided investors with "positive excess returns" for investors seeking exposure to these markets. Each fund's five-year returns are presented alongside the returns of their relevant benchmark and a website where potential clients can obtain more detailed information is listed. Has Choi most likely violated the Standards? A No B Yes, by failing to provide sufficient information C Yes, by misleading potential clients with the implication that returns have been positive

Answer 29

A No According to Standard III(D) - Performance Presentation, members and candidates must ensure that communication of performance is "fair, accurate, and complete." In this example, the claim of positive excess returns is accurate because, although the funds have posted negative returns, each fund has outperformed its relevant benchmark. The clients are also given a presentation of the five-year returns with the benchmark returns, eliminating any potential misinterpretation. When the format of communications does not allow for a detailed presentation, it is recommended that a reference to the limited nature of the information be made, and more detailed information must be provided upon request.

Question 30

Which of the following statements about preference shares is most likely correct? A Preference shareholders are paid dividends after common shareholders B Compared to common shares, preference shares are less risky because their dividend payments are fixed and known C Because their claims rank above those of common shareholders, preference shareholders will receive par value in the event of a liquidation

Answer 30

B Compared to common shares, preference shares are less risky because their dividend payments are fixed and known

Question 31

Which of the following statements is most accurate? A US Treasury securities do not expose investors to liquidity risk B On-the-run US Treasury securities are less liquid than otherwise equivalent off-the-run US Treasury securities C Off-the-run US Treasury securities carry greater liquidity risk than otherwise equivalent on-the-run US Treasury securities

Answer 31

C Off-the-run US Treasury securities carry greater liquidity risk than otherwise equivalent on-the-run US Treasury securities Investors who hold off-the-run US Treasury securities have some exposure to liquidity risk as these seasoned issues are less liquid than otherwise equivalent on-the-run US Treasury securities. US Treasury securities do not carry credit risk. However, investors are still exposed to liquidity risk especially when the demand for risky assets increases and investors cannot sell the treasuries without taking a huge loss.

Question 32

The party to a futures contracts who has received a margin call is least likely to take which of the following actions? A Close out the contract without depositing additional funds B Deposit additional funds to bring the account balance to the initial margin C Deposit additional funds to bring the account balance to the maintenance margin

Answer 32

C Deposit additional funds to bring the account balance to the maintenance margin When a party's account balance falls below the maintenance margin, a margin call is made. The party must deposit additional funds sufficient to bring the account's balance back to the initial margin level, not just back to the maintenance margin. Alternatively, the party can close out (settle) the contract without having to deposit any additional funds.

Question 33

formula to find the implied arbitrage free forward rate

Answer 33

spot rate * e^((rf - rd) * n)

Question 34

Which of the following types of markets is most likely characterized by extended periods of complete illiquidity during the trading day? A Call markets B Brokered markets C Continuously traded markets

Answer 34

A Call markets Call markets conduct periodic auctions to determine a clearing price that maximizes trading volume. Such markets can be highly liquid at the specific auction times, but they are completely illiquid at all other times. By contrast, trading can occur whenever a continuously traded market is open. While brokered markets are used as a venue for trading illiquid assets, they are never characterized by complete illiquidity.

Question 35

Compared to an otherwise identical option-free bond, a putable bond's convexity is most likely: A lower. B the same. C higher.

Answer 35

C higher. a putable bond behaves like an equivalent option-free bond if interest rates are below its exercise rate. However, as the interest rates increase and the put option becomes more valuable, the value of the putable bond will decrease more slowly than that of the vanilla bond. The prices of bonds with more convexity appreciate more when interest rates fall and depreciate less when interest rates rise. All else equal, adding a put option to an option-free bond increases convexity.

Question 35

no arbitrage forward price for a stock steps

Answer 35

1. Forward rate = Spot rate * (1 + r)^T 2. determine contract’s mark-to-market value from the perspective of the long party Vt(T) = St - F0(T) * (1 + r)^(-(T-t))

Question 36

Which of the following is least likely correct with regard to the value at risk (VaR) measure? A It is a maximum extreme loss metric B It measures the size of the tail of the distribution of profits for an entity C It contains three elements – an amount stated in the units of currency, a time period, and a probability

Answer 36

A It is a maximum extreme loss metric VaR is a minimum extreme loss metric. VaR is interpreted as the minimum loss an entity can have with some probability. VaR measures the size of the tail of the distribution of profits for an entity. It contains the following three elements: An amount stated in the units of currency A time period A probability

Question 37

In order to value an equity security, an analyst has collected information regarding cash flows available to be distributed to shareholders, capital expenditures of the company, and working capital needs. The analyst is most likely using: A a multiplier model. B a present value model. C an asset-based valuation model.

Answer 37

B a present value model. Cash flows available to be distributed to shareholders, capital expenditures of the company and working capital needs of the company are inputs required for determining equity value using a present value model.

Question 38

Compared to a multiple-price auction process for a sovereign bond issue, a single-price auction is most likely to result in: A a wider range of bids a lower cost of funds. B a narrower range of bids a lower cost of funds. C a narrower range of bids a higher cost of funds.

Answer 38

A a wider range of bids a lower cost of funds. A single-price auction requires all bonds in the issue to be purchased for the same price. In other words, those who submit bids with lower yields can benefit from higher-yield (lower price) bids. This dynamic tends to reduce the issuer's borrowing costs because participants can submit low-yield competitive bids that have a high likelihood of being accepted while knowing that the yield they actually receive is likely to be higher. By contrast, in a multiple-price auction, participants are required to pay the specific price that they have bid. This structure incentivizes a narrower range of bids.

Question 39

Which of the following statements is most accurate? A Stablecoins can be exchange for fiat money B A stablecoin is collateralized by a basket of assets C A stablecoin's volatility is mitigated by regulatory backing

Answer 39

B A stablecoin is collateralized by a basket of assets in order to minimize their volatility, stablecoins are collateralized by a basket of assets, to which their value is linked. While the assets in these baskets are often legal tender, stablecoins cannot be exchanged for fiat money. Nor do they have any legal or regulatory backing.

Question 40

In an investment policy statement (IPS), a client's risk objectives should most likely be stated: A in relative terms only. B in absolute terms. C in either absolute or relative terms.

Answer 40

C in either absolute or relative terms. Either absolute or relative are acceptable approaches to specifying risk objectives. If relative, they should reference a suitable benchmark, such tracking risk relative to an index.

Question 41

hich of the following is most likely the biggest source of risk from holding non-negotiable certificates of deposit (CDs) rather than negotiable CDs? A Credit risk B Liquidity risk C Interest rate risk

Answer 41

B Liquidity risk If a certificate of deposit (CD) is non-negotiable, investors are not allowed to sell the certificate. They will also pay a withdrawal penalty to access the money early. Negotiable CDs allow investors to sell the certificate on the open market.

Question 42

Which of the following statements is most accurate? General obligation bonds issued in the US municipal bond market: A may be taxable. B are considered riskier than revenue bonds. C are backed by the full faith and credit of the federal government.

Answer 42

A may be taxable. While coupon payments from most US municipal bonds are exempt from federal income tax, some non-sovereign government bonds are taxable. General obligation municipal bonds are backed by the issuer's taxation authority, but their performance is not guaranteed by the federal government. These are considered to be less risky than revenue bonds, which are dependent on a single source of revenue (e.g., road tolls).

Question 43

treynor ratio formula

Answer 43

1. find weighted average Beta 2. find protfolio return 3. (Portfolio return - RF) / Portfolio Beta

Question 44

The formula for linear interpolation is:

Answer 44

Low value + (High value - Low value) * (Goal reference - Low reference) / (High reference - low reference)

Question 45

maximum initial leverage ratio formula

Answer 45

1 / initial margin requirement

Question 46

The put-call parity formula is:

Answer 46

s0 + p0 = c0 + X / ((1 + r)^T) s0: value of the underlying asset today p0: today's put price c0: today's call price X: strike price

Question 47

enterprise value formula

Answer 47

EV = market capitalization + MV of preferred stock + MV of debt - (Cash + Short-term investments)

Question 48

Angel investments in start-up companies are most likely made in the: A idea stage. B seed stage. C early stage.

Answer 48

A idea stage.

Question 49

hich of the following statements is most accurate? Unlike other types of asset-backed securities, a collateralized debt obligation (CDO): A has a collateral manager. B does not have an equity tranche. C does not require the creation of a special purpose entity.

Answer 49

A has a collateral manager. A CDO issues debt through a special purpose entity and uses the proceeds to purchase assets that are expected to generate a portfolio return in excess of the cost of debt. The portfolio of assets is created and overseen by a CDO manager, also known as a collateral manager. The CDO structure involves several different types of tranches that offer different levels of expected returns. The most senior tranches are relatively low-risk, low-return, while the residual (equity) tranche offers the highest expected return for investors with higher levels of risk tolerance.

Question 50

duration gap formula

Answer 50

macaulay duration - investment horizon macaulay duration = modified duration * (1 + rf)

Question 51

Which of the following measures is most accurately described as the return that investors require in excess of a reference rate as compensation for holding a floating-rate note? A Quoted margin B Discount margin C Yield to maturity

Answer 51

B Discount margin

Question 52

An analyst valuing a struggling company with insufficient cash flow to pay dividends would most likely use: A a P/E multiplier model. B an asset-based valuation model. C either a P/E multiplier model or an asset-based valuation model.

Answer 52

B an asset-based valuation model. It would be best to use an asset-based valuation model in this case. Since it values the company as the sum of the pieces, the calculation does not depend on current financial performance.

Question 53

A private debt firm raising funds for a leveraged buyout is considering mezzanine financing as an alternative source of capital. Compared to direct lending, mezzanine financing most likely: A has higher seniority. B pays a lower coupon rate. C offers greater upside potential.

Answer 53

C offers greater upside potential. The loan provided by private debt investors through direct lending is typically senior and secured, while mezzanine debt refers to private credit that is subordinated to senior secured debt but senior to equity in the borrower's capital structure. Due to the junior ranking and the fact that it is usually unsecured, mezzanine debt is riskier than senior secured debt. Investors of mezzanine debt would demand higher interest rates to compensate for the heightened risk profile.

Question 54

calculating the fair value of a put option using the put-call parity formula:

Answer 54

p0 = c0 - s0 + X/(1 + r)

Question 55

The spot price of silver is $15.50 per ounce and the price of a 1-year forward contract is $16.20 per ounce. If the risk-free rate is 4.0% which of the following statements about the silver market is most likely correct? A The market is in contango and the convenience yield is greater than storage costs B The market is in contango and storage costs are greater than the convenience yield C The market is in backwardation and the convenience yield is greater than storage costs

Answer 55

B The market is in contango and storage costs are greater than the convenience yield When forward prices exceed the spot price, as in this example, a commodity market is described as being in contango. we then use the formula to confirm which is greater between storage costs and convenience yield futures prices = spot price * (1 + r) + Storage costs - convenience yield

Question 56

A company announces improved quarterly financial results that are consistent with market expectations. The value of the company's shares, which trade in an informationally-efficient market is most likely to: A remain unchanged. B increase immediately. C increase over the course of the trading day.

Answer 56

A remain unchanged. In an efficient securities market, stock prices shall be adjusted or shall react only to “unexpected” or “surprise” elements of new information. Quarterly financial results that are consistent with market expectations should not cause prices to change.

Question 57

Which of the following types of investors most likely expect a return of at least the risk-free rate as compensation for holding a risky asset? A Risk-averse only B Risk-averse and risk-neutral only C Risk-averse, risk-neutral, and risk-seeking

Answer 57

B Risk-averse and risk-neutral only Risk-adverse investors expect to earn a premium above the risk-free rate as compensation for holding risky assets. Although risk-neutral investors do not expect a premium, they do require a return equal to the risk-free rate.

Question 58

Compared to typical alternative investment vehicles, liquid alternative investment products marketed to retail investors are most likely to be characterized by lower: A use of leverage. B regulatory constraints. C allocations to liquid assets.

Answer 58

A use of leverage. Alternative investment vehicles such as limited partnerships are generally restricted to accredited investors, such as institutions and high-net-worth individuals. More recently, asset managers have developed liquid alternative vehicles as pooled investment products for retail investors. Compared to typical alternative investment vehicles, liquid alternatives are more highly regulated, use less leverage, have higher allocations to liquid assets, and do not charge performance fees.

Question 59

A security's excess return is most likely plotted against the market's excess return on the: A capital market line. B security market line. C security characteristic line.

Answer 59

C security characteristic line. The security characteristic line plots the performance of a specific security (or portfolio) against that of the market portfolio. It is a plot of the excess return of a security against the excess return on the market.

Question 60

Kyle Hodgson is an equity analyst covering the automotive parts sector for Frontier Capital. For his latest project, Hodgson uses a simple linear regression model to determine the sensitivity of Cranston Automotive (CRA) stock returns to the overall equity market, which is the beta measure. Hodgson gathers 48 months of return data for CRA, the dependent variable, and a benchmark equity index, the independent variable. Given his chosen model, Hodgson is least likely to observe the: A fitted parameter for beta. B estimated parameter for beta. C population parameter for beta.

Answer 60

C population parameter for beta. Linear regression analysis computes a line that provides the best fit for the observed values of the independent and dependent variables. However, the regression coefficients (intercept and slope) are only estimates of the population parameters, which cannot be observed. The coefficients generated by a linear regression analysis are referred to as estimated parameters or fitted parameters.

Question 61

Which of the following statements is most accurate? A IFRS allow interest paid to be reported as an investing cash flow B US GAAP require dividends received to be reported as a financing cash flow C IFRS allow the indirect format to be used for presenting the statement of cash flows

Answer 61

C IFRS allow the indirect format to be used for presenting the statement of cash flows Both IFRS and US GAAP encourage companies to use the direct method when presenting the statement of cash flows, but both standards also allow the use of the indirect method.

Question 62

Under IFRS, actuarial gains from a defined benefit pension plan will most likely be recognized on the sponsor's: A income statement. B statement of other comprehensive income and amortized over time. C statement of other comprehensive income and not amortized over time.

Answer 62

C statement of other comprehensive income and not amortized over time. Under IFRS, actuarial gains and losses are part of remeasurements, which are recognized on the sponsor's statement of other comprehensive income and are not subsequently amortized.

Question 63

he modeling of relationships using labeled training data is most accurately described as: A data curation. B supervised learning. C unsupervised learning.

Answer 63

B supervised learning.

Question 64

Collusion in price setting is most likely to occur when firms: A have similar cost structures. B sell heterogeneous products. C fill infrequent orders at relatively high prices.

Answer 64

A have similar cost structures. Collusion is more likely if products are homogeneous and firms have similar cost structures. Collusion becomes less likely if firms make infrequent sales for relatively high prices.

Question 65

A firm in a monopolistically competitive market most likely: A maximizes the selling price of its goods. B sells fewer goods than is socially optimal. C sets a price at the point where its marginal cost curve intersects with the demand curve.

Answer 65

B sells fewer goods than is socially optimal. A monopolistically competitive firm focuses on product differentiation. The different varieties of products offered imply there would be fewer goods sold than is socially optimal as opposed to a perfectly competitive firm. In this market, companies profit through innovation and experiment instead of price competition that tries to maximize the quantities sold.

Question 66

interest coverage ratio formula

Answer 66

(CFO + Interest paid + taxes paid) / Interest paid

Question 67

Companies that issue financial statements in accordance with IFRS are least likely required to disclose: A the main classes of assets affected by impairment losses. B an itemized list of assets that have incurred impairment losses. C the events and circumstances responsible for the recognition of impairment losses.

Answer 67

B an itemized list of assets that have incurred impairment losses. According to IFRS, companies are required to disclose the amounts of impairment losses (and/or reversals of impairment losses) for each asset class. An itemized list of assets that have incurred impairment losses is not required. Companies must also disclose the main classes of assets affected by impairment losses (and/or reversals of impairment losses) as well as the events and circumstances that lead to these losses and/or reversals of losses being recognized.

Question 68

steps to find the standard error of the sample mean

Answer 68

1. average of the resample means 2. average of resample means * (1 / n - 1) 3. Square root of amount found in 2

Question 69

The financial statement analysis framework includes the following steps: Step 1: Articulate the purpose and context of the analysis Step 2: Collect input data Step 3: Process data Step 4: Analyze/interpret processed data Step 5: Develop and communicate conclusions/recommendations Step 6: Follow-up During which of these steps would an analyst most likely perform Monte Carlo simulations? A Step 2 B Step 3 C Step 4

Answer 69

B Step 3 After collecting input data in Step 2, analysts use statistical methods such as Monte Carlo simulations in Step 3.

Question 70

Monte Carlo simulation

Answer 70

A Monte Carlo simulation is a way to model the probability of different outcomes in a process that cannot easily be predicted due to the intervention of random variables. It is a technique used to understand the impact of risk and uncertainty. Monte Carlo simulations can be applied to a range of problems in many fields, including investing, business, physics, and engineering. It is also referred to as a multiple probability simulation. A Monte Carlo simulation is a model used to predict the probability of a variety of outcomes when the potential for random variables is present. Monte Carlo simulations help to explain the impact of risk and uncertainty in prediction and forecasting models. A Monte Carlo simulation requires assigning multiple values to an uncertain variable to achieve multiple results and then averaging the results to obtain an estimate. These simulations assume perfectly efficient markets. Monte Carlo simulations are increasingly used in conjunction with artificial intelligence.

Question 71

coefficient of variation formula

Answer 71

CV = s/X sample standard deviation / sample mean

Question 72

Enrico Traina, CFA, owns and operates a small investment advisory firm. When dealing with clients, Traina only recommends securities that appear on his list of approved investments, but he does not mention that the due diligence on the securities that appear on this list has been conducted by one of the brokerage firms that he uses to execute trades for his clients' accounts. Traina believes that the broker's research methods are sound and is careful to recommend stocks that are consistent with a client's investment policy statement (IPS). Traina has most likely violated the Standards with respect to: A misrepresentation only. B communication with clients and prospective clients only. C both misrepresentation and communication with clients and prospective clients.

Answer 72

C both misrepresentation and communication with clients and prospective clients. Triana violates Standard I(C) - Misrepresentation by knowingly omitting to mention that the due diligence on the securities he recommends has been conducted by a third party. Failing to mention this fact is also a violation of Standard V(B) - Communication with Clients and Prospective Clients, which requires members and candidates to disclose "the basic format and general principles of the investment process they use to analyze investments, select securities, and construct portfolios."

Question 72

Calvin Beauregard, CFA, works as an analyst with a securities dealer. For each potential investment that he is assigned to work on, Beauregard adheres to local laws by retaining electronic copies of all relevant documents for six years, at which point they are removed from the firm's server. Documents that are produced as hard copies are scanned and saved in digital form before the original copies are securely shredded. Has Beauregard most likely violated the Standards? A No B Yes, by destroying hard copies of documents C Yes, by retaining records for less than seven years

Answer 72

A No Beauregard has not violated the Standards. According to Standard V(C) - Record Retention, members and candidates must maintain hard or soft copies of all documents that support their "investment analyses, recommendations, actions, and other investment-related communications with clients and prospective clients." While CFA Institute recommends that records be maintained for a period of seven years, Beauregard does not violate this Standard by maintaining his records for the six-year period required by local laws.

Question 72

Under the matching principle, administrative costs are least likely to be recognized as expenses for the period when: A cash is paid. B the benefit is received. C the corresponding revenue is recognized.

Answer 72

C the corresponding revenue is recognized. Under the matching principle, expenses that can be directly tied to revenues are recognized when the revenue is recognized. For example, the cost of goods sold expense is recognized when inventory is sold. However, expenses that cannot be easily linked to specific revenues should be recognized during the period when they are incurred or the benefit is received. For example, the salary of an inventory warehouse manager is not directly linked to the sale of any particular item that has been stored in the facility. The company should recognize this expense as it receives the benefit of the manager's services and pays the manager's salary.

Question 72

Which of the following statements is most accurate? Under US GAAP, companies that use the FIFO method must measure inventories at: A cost. B the lower of cost or market value. C the lower of cost or net realizable value.

Answer 72

B the lower of cost or market value. Historically, US GAAP required inventories to be measured at the lower of cost or market value. Since 15 December 2016, companies that do not use LIFO or retail inventory methods must carry inventories at the lower of cost or net realizable value. This new requirement is similar to the reporting requirements imposed by IFRS.

Question 73

Which of the following is most accurate with respect to Modigliani and Miller’s Proposition II without taxes? A The cost of equity increases linearly with the debt-to-equity ratio. B The market value of a company is not affected by the capital structure of the company. C The market value of a levered company is equal to the value of an unlevered company plus the value of the debt tax shield

Answer 73

A The cost of equity increases linearly with the debt-to-equity ratio.

Question 73

Which of the following statements is most likely correct regarding currencies that trade in foreign exchange markets? A The currency with the higher interest rate will trade at a forward discount B Currencies trade in foreign exchange markets based on real exchange rates C An increase in a direct exchange rate quote means that the domestic currency is appreciating versus the foreign currency

Answer 73

A The currency with the higher interest rate will trade at a forward discount The currency with the higher interest rate will tend to trade at a forward discount. Currencies trade in foreign exchange markets based on nominal rather than real exchange rates. A direct exchange rate quote uses the domestic currency as the price currency and the foreign currency as the base currency. An increase in this rate means that it takes more units of the price (domestic) currency to purchase one unit of the base (foreign) currency. Therefore, the domestic currency is depreciating relative to the foreign currency if the direct exchange rate quote increases.

Question 74

cash ratio formula

Answer 74

(cash + marketable securities) / current liabilities

Question 75

quick ratio formula

Answer 75

(cash + marketable securities + receivables) / Current liabilities

Question 76

using the estimated slope coefficient, how do you calculate the T test?

Answer 76

t = (estimated slope coefficient - hypothesized slope coefficient) / standard error

Question 77

Historically, which set of ESG factors has least likely been treated as negative externalities? A Social B Governance C Environmental

Answer 77

B Governance Until relatively recently, social and environmental factors have been treated as negative externalities, meaning that their associated costs were not thought to be borne by companies or their investors.

Question 78

how to find the sample target semi deviation?

Answer 78

1. you find all the sample values lower or equal than the target and you do sum of all (Sample value - Target)^2 and those higher than the target are recorded as zero 2. you divide this amount by (n - 1) 3. you find the square root of this total and that is the answer

Question 79

A sample of 20 months of normally distributed returns has a mean of 0.7% and a standard deviation of 3.5%. The population variance is unknown. To test the null hypothesis that the mean return for the population is less than 1.0%, which of the following tests is most likely appropriate? A A t-test only B A z-test only C Either a t-test or a z-test

Answer 79

A A t-test only ecause the sample size in this example is small (less than 30) and the population variance is unknown, it is inappropriate to use a z-test. The t-test is always considered more appropriate in such circumstances.

Question 80

If the largest firm in a perfectly competitive market increases its production and unit sales by 5%, the increase in the firm's total revenue will most likely be: A less than 5%. B equal to 5%. C more than 5%.

Answer 80

B equal to 5%. The total revenue equals the price times quantity sold. Firms operating in perfectly competitive markets are price takers. An increase in supply by one firm - even the market leader - will not affect the equilibrium price. Therefore, total revenue increases proportionately with the increase in units sold.

Question 81

hich of the following is most likely considered a cost of international trade? A Lower prices for exports B Lower efficiency due to increased specialization C Adjustments to the allocation of resources among domestic industries

Answer 81

C Adjustments to the allocation of resources among domestic industries A commonly cited cost of international trade is that industries will be required to adjust to the new competitive landscape. Resources will be allocated away from contracting industries, which will result in job losses and the need to retrain workers.

Question 82

deferred tax asset (liability) formula

Answer 82

(Carrying value - Tax base) * Tax rate

Question 83

Franklin Motamba, CFA, works as a sell-side equity analyst and has covered the pharmaceutical sector for over a decade. Last year, Motamba's father passed away after suffering from cancer for several years. Motamba later accepted a volunteer position on the board of the Patient Care Foundation (PCF), which advocates for the interests of cancer patients and has a history of lobbying for the approval of new cancer drugs that pre-dates his involvement with the organization. Motamba's employer is aware of his volunteer work and has no business relationship with PCF. Since joining PCF's board, Motamba has disclosed this position in all research reports published under his name. Upon learning that Colprex Pharmaceuticals unexpectedly received approval to market a new cancer drug, Motamba spends several hours updating his model before changing his recommendation for Colprex from "neutral" to "buy". Has Motamba most likely violated the Standards? A No B Yes, with respect to independence and objectivity C Yes, with respect to diligence and reasonable basis

Answer 83

A No Motamba has not violated the Standards. According to Standard I(B) - Independence and Objectivity, members and candidates must not "offer, solicit, or accept any gift that reasonably could be expected to compromise their own or another's independence and objectivity." In this example, Motamba receives no consideration of any kind for serving as a volunteer. Although PCF advocates for the approval of new cancer drugs, Motamba's role as a director does not create an incentive for him to issue reports that are less-than-objective about the prospects for the pharmaceutical firms that he covers.

Question 83

cash conversion cycle formula

Answer 83

days of receivable + days inventory - days of payable

Question 84

What is the most accurate assessment of the following statements? Statement 1: A portfolio's time-weighted rate of return is affected by cash withdrawals and additions. Statement 2: The money-weighted return is an inappropriate measure to use when assessing the performance of a fund manager who does not control the timing and amount of cash withdrawals and additions. A Only Statement 1 is correct B Only Statement 2 is correct C Statement 1 and Statement 2 are both correct

Answer 84

B Only Statement 2 is correct Statement 2 is correct. A fund manager's performance should only be judge on the basis of his or her decisions and actions, not on the basis of events over which he or she has no control. The money-weighted return can be skewed by the timing and amount of cash flows into and out of a fund, making it an inappropriate metric for assessing the performance of a manager who has no control over these. Statement 1 is incorrect. The time-weighted return measure is unaffected by the timing and amount of cash flows.

Question 85

A valuation allowance is least accurately described as: A a reserve created against deferred tax assets. B being required by IFRS if expectations of future economic benefits are diminished. C being based on the likelihood of realizing the deferred tax assets in a future accounting period.

Answer 85

B being required by IFRS if expectations of future economic benefits are diminished. A valuation allowance is a reserve created against deferred tax assets in accordance with US GAAP. It is based on the likelihood of realizing the deferred tax assets in a future accounting period. The valuation allowance is not required by IFRS.

Question 86

Kentaro Ino, CFA, owns a 9% shareholder position of Vandyke Motors (VDM). Local regulations require public disclosure of any ownership position over 10%. However, this requirement applies only to direct stock ownership, not derivatives-based positions. Over the next three months, Ino, an activist investor, intends to execute a hostile takeover of VDM. However, in order to avoid having to publicly disclose his position before pursuing this strategy, Ino acquires VDM call options that expire in 6 months. Ultimately, Ino is able to exercise his call options for less than VDM's prevailing market price as part of his successful takeover bid. Has Ino most likely violated the Standards? A No B Yes, by engaging in transaction-based manipulation C Yes, by engaging in information-based manipulation

Answer 86

A No Standard II(B) - Market Manipulation prohibits members and candidates from engaging in "practices that distort prices or artificially inflate trading volume with the intent to mislead market participants." This Standard does not prohibit legitimate trading strategies. In this example, Ino has complied with the relevant regulation. He had no obligation to publicly declare his ownership position until after the options had been exercised. While unwelcome by managers of companies that are targeted, hostile takeovers are not inherently unethical. Ino has attempted to ensure that he does not overpay for VDM, but he has not acted to intentionally mislead market participants by distorting prices or trading volume.

Question 87

An investor exhibiting base-rate neglect will most likely: A neglect the rate of incidence in a small sample and overweight individual information. B neglect the rate of incidence in a small sample and underweight individual information. C underweight the rate of incidence in the large population and overweight individual information.

Answer 87

C underweight the rate of incidence in the large population and overweight individual information. Base-rate neglect refers to the scenario where a phenomenon’s rate of incidence in a larger population (i.e., the base rate) is neglected in favor of specific, individual information. An investor exhibiting this bias will likely place an unreasonably large weight on individual information and overlook the more appropriate, general information.

Question 88

Returns on timberland investments are least likely affected by: A land price changes. B lumber price volatility. C biological growth rates.

Answer 88

B lumber price volatility. An advantage of timber is that it can simply be stored by not harvesting. If the price of lumber falls, production can be slowed until it recovers. The three main return drivers for investments in timberland are biological growth, commodity price changes, and land price changes.

Question 89

Risk shifting is most accurately described as: A passing risk to another party. B taking actions that change the distribution of outcomes. C taking only those risks that are consistent with an enterprise's risk tolerance and expertise.

Answer 89

B taking actions that change the distribution of outcomes. Risk shifting is defined as taking actions to change the distribution of outcomes. Passing risk to another party is known as risk transfer. Taking only risks that are consistent with an enterprise's risk tolerance and expertise is a form of risk acceptance.

Question 90

The short party to an American-style put option contract most likely has the: A obligation to sell the underlying. B right to purchase the underlying. C obligation to purchase the underlying.

Answer 90

C obligation to purchase the underlying.

Question 91

You are provided with the following details of a leveraged stock purchase: Purchase price: £65.00 Initial margin requirement: 50% Maintenance margin requirement: 25% A margin call will most likely occur when the stock price drops below: A £26.00. B £43.33. C £48.75. how do you answer this question?

Answer 91

1. The investor posted an initial margin of £65.00 x 50% = £32.50. A margin call will occur when the stock price decreases to a point where the ratio below equals 25%. (Equity / Share) / (Price / Share) = 25% (32.50 - (65 - P)) / P = 25% P = $43.33

Question 92

Investments by venture capital firms to support a company's product development are most likely made at the: A seed stage. B early stage. C angel investing stage.

Answer 92

A seed stage. Angel investments, which are typically made by individuals, support activities such as the development of a business plan. Venture capital firms generally do not make investments until the seed stage, during which product development occurs. Early-stage investments typically fund the initial phase of commercial production.

Question 93

The minimum value of a European call is most accurately described as: A the maximum of zero and the underlying price minus the exercise price. B the minimum of zero and the underlying price minus the present value of the exercise price. C the maximum of zero and the underlying price minus the present value of the exercise price.

Answer 93

C the maximum of zero and the underlying price minus the present value of the exercise price.

Question 94

A portfolio manager is analyzing an 8-year, 6.25% annual coupon corporate bond that is callable at par after 4 years. If the bond's Z-spread is 110 basis points (bps), its option-adjusted spread is most likely: A less than 110 bps. B 110 bps as well. C greater than 110 bps.

Answer 94

A less than 110 bps. The option-adjusted spread (OAS) measure indicates what the yield spread would be if a bond had no embedded options. Mathematically, for a callable bond: OAS = Z-spread - Option Value (in basis points) For a callable bond, the issuer can exercise its option to buy back the callable bond if interest rates fall. Since the option value is positive (from the perspective of the issuer), the OAS must be smaller than the Z-spread, which is 110 bps in this example.

Question 95

A collateralized debt obligation (CDO) backed by asset-backed securities is most accurately described as a: A synthetic CDO. B structured finance CDO. C collateralized loan obligation.

Answer 95

B structured finance CDO. Structured finance CDOs are backed by asset-backed securities, residential or commercial mortgage-backed securities, or even other CDOs. Synthetic CDOs are backed by credit default swaps, while collateralized loan obligations are backed by leveraged bank loans.

Question 96

Michael Bell is a financial analyst who has recently joined Horseshoe Financials Inc., a small investment bank specializing in the energy sector. Bell’s supervisor, Archer Morgan, tasks him with estimating the return on a specific oil index for this quarter. To do this, Bell runs a financial model based on historical data and generates a return of 5% relative to the index's current level with a range of 4.85% to 5.10%. After reviewing the results of Bell's work, Morgan makes the following recommendation: “Basing our estimate on the output on one model is too risky. I believe we should use multiple models to get different forecasts so we are able to make a better estimate.” Morgan’s recommendation is least likely aimed at mitigating: A overconfidence bias. B mental accounting bias. C anchoring and adjustment bias.

Answer 96

B mental accounting bias. A recommendation to use multiple models in order to produce a better estimate for the index's return is least likely to mitigate mental accounting bias, which is the tendency for investors to treat funds differently depending on their source or intended use, despite the fact that money is fungible. By contrast, Morgan's advise is directly relevant to the mitigation of both overconfidence bias and anchoring and adjustment bias. Overconfidence bias occurs when people overestimate their own abilities in making predictions. They often assign excessively great probabilities to uncertain outcomes (e.g., financial forecasts). Using different models allows analysts to adopt different perspectives when estimating potential outcomes and allow for a greater range of uncertainty. Anchoring and adjustment bias occurs when people rely too much on an initial piece of information (i.e., the "anchor") in estimating an unknown value. In this case, an estimate that is rooted to the index's initial level and historical performance may not be comprehensive enough to capture the impact of critical return drivers, such as supply and demand dynamics. To overcome this bias, analysts should focus on the important details of different scenarios to produce appropriate estimates based on unique circumstances. This can be done by using different models or assumptions to create a range of estimates.

Question 97

The economic exposure faced by company’s debtholders can most accurately described as the combination of: A a risk-free bond and a short put option. B a risk-free bond and a short call option. C a long position in the company’s assets and a short put option.

Answer 97

A a risk-free bond and a short put option. The potential upside for lenders is limited to the borrower’s contractual obligations. However, lenders may receive less than this amount if the borrower defaults. A company’s bondholders have effectively sold a put option that gives shareholders the right to all of a company’s value in excess of its liabilities. The spread that lenders charge over the risk-free rate can be interpreted as the premium that shareholders pay for this put option.

Question 98

nterprise value models are most appropriate to value equity when comparing companies with significantly different: A revenues. B asset values. C capital structures.

Answer 98

C capital structures. Utilizing enterprise value models to value equity is the most useful approach when comparing companies with significantly different capital structures.

Question 99

By disseminating value-relevant information, fundamental analysts most likely ensure that markets are: A weak form efficient. B strong form efficient. C semi-strong form efficient.

Answer 99

C semi-strong form efficient. Fundamental analysis is necessary in a well-functioning market because this analysis helps the market participants understand the value implications of information. It facilitates semi-strong efficient markets by disseminating value-relevant information.

Question 100

n entity with a mandate from a sovereign government issues bonds that are backed by collateral but not explicitly guaranteed by any government. The entity's bonds are most accurately described as: A supranational bonds. B quasi-government bonds. C non-sovereign government bonds

Answer 100

B quasi-government bonds. Quasi-government bonds, or agency bonds, are bonds issued by national government organizations, such as the Federal Home Loan Bank in the United States. Supranational bonds are those issued by supranational agencies, like the International Monetary Fund, the World Bank, or the European Investment Bank. Non-sovereign government bonds are those issued by levels of government below the national level, like provinces, regions, states, and cities.

Question 101

company trailing P/E ratio:

Answer 101

Trailing P/E ratio = Stock price / Trailing EPS = Stock price / (past year earnings / shares outstanding)

Question 102

how to find the beta of a portfolio

Answer 102

weighted average of Betas

Question 103

The difference between a repurchase agreement and a reverse repurchase agreement is most likely the: A collateral. B repurchase rate. C perspective of the counterparty.

Answer 103

C perspective of the counterparty.

Question 104

At which point in the portfolio management process is security analysis most likely performed? A During the planning step B During the execution step C Before the asset allocation step

Answer 104

B During the execution step Thee portfolio management process involves the broad step: The Planning Step The Execution Step The Feedback Step Within the execution step, the following tasks are completed: 1. Asset allocation 2. Security analysis 3. Portfolio construction

Question 105

Jensen Alpha formula

Answer 105

Jensen Alpha = Rp - (Rf - Bp * (Rm - Rf))

Question 106

treynor ratio formula

Answer 106

Treynor Ratio = (Rp - Rf) / Bp

Question 107

A restriction on the percentage of a pension plan's assets that may be invested in securities issued by its sponsor is most accurately described as a: A risk budget. B unique circumstance. C self-investment limit.

Answer 107

C self-investment limit. Pension plans are often subject to restrictions such as a maximum percentage allocation to equities. Restrictions on holding securities issued by the plan sponsor are known as self-investment limits. Such a restriction is included among the investment policy statement's legal and regulatory constraints.

Question 108

formula to price a forward contract at initiation

Answer 108

F0 = S0 * (1 + r)^T S0 = spot price of the underlying at initiation r = risk-free rate T = term of the forward contract

Question 109

formula of the value of a forward contract after initiation

Answer 109

Vt(T) = St - F0(T) * (1 + r)^(-T-t) St = spot price of the underlying at time t

Question 110

New Frontier Enterprises (NFE), a manufacturer of oil and gas drilling equipment, is a mature-stage company with stable, predictable profits and relatively limited growth opportunities. Nolan Dirk, an equity analyst, is forecasting the company's expected financial statements for the coming year (20X9) by taking figures reported for 20X8 and making any adjustments deemed necessary based on macroeconomic data, industry growth expectations, and company-specific analysis. Inflation has been positive for more than a decade and Dirk forecasts that this trend to continue, leading to increases in various items on NFE's income statement. However, because the company uses the straight-line method, Dirk expects the company's depreciation expend to be unchanged from the $250 million recorded for 20X8. For his pro forma statement of cash flows, Dirk forecasts VDF's 20X9 capital expenditures to be $275 million, of which $250 million is deemed to be for maintenance and $25 million is assumed to be for expansion projects. Is Dirk's estimate of NFE's 20X9 maintenance capital expenditures most likely appropriate? A Yes B No, because NFE is in the mature-stage company C No, because NFE is operating in an inflationary environment

Answer 110

C No, because NFE is operating in an inflationary environment Dirk's $250 million estimate of maintenance capital expenditures for 20X9 is equal to the depreciation expense forecast. This is inappropriate because maintenance capital expenses should exceed the depreciation expense to account for inflation.

Question 111

is a portfolio standard deviation minimized when the correlation is 0 or -1?

Answer 111

-1

Question 112

Which of the following most accurately describes futures contracts relative to forward contracts? A Greater flexibility B Higher counterparty risk C Subject to daily price limits

Answer 112

C Subject to daily price limits Because they are customizable, forward contracts are highly flexible. By contrast, futures contracts are highly standardized with terms specified by the exchange on which a contract trades.

Question 113

he J-Curve effect exhibited by private equity and real estate investors most likely refers to a fund’s: A net cash position. B performance fee payments. C degree of portfolio diversification.

Answer 113

A net cash position. The J-Curve effect describes the cash pattern observed in many alternative investment funds. In its early years, a typical fund exhibits negative cash flows as capital is drawn and investments are made. The negative cash flow trend during this period is exacerbated by management fees paid to general partners. This pattern bottoms out as investments begin to generate cash. Net cash flows continue to increase as a fund moves into the later stages of its life.

Question 114

A stock that has seen its earnings yield decrease significantly over the past two months without any significant change in company performance or outlook is most likely: A to have a lesser impact on the performance of an equally-weighted index. B to have a greater impact on the performance of a fundamentally-weighted index. C the subject of speculation that it will be added to a popular value­-weighted index.

Answer 114

C the subject of speculation that it will be added to a popular value­-weighted index. Earnings yield is the ratio of past or expected earnings per share to share price. A decreasing earnings yield occurs when price increases relative to earnings. Because there has been no change in company performance or outlook, the change in this example is most likely due to price increases caused by speculative buying, which can occur when fund managers purchase the shares that they believe will be added to the benchmark against which their performance is assessed.

Question 115

atrix pricing is most likely to be used to value bonds when: A the bonds are illiquid. B the yield curve is inverted. C the bonds contain embedded options.

Answer 115

A the bonds are illiquid. Matrix pricing is an approach to value bonds when the market interest rate is unknown. The rate wouldn't be known because that particular bond is not commonly traded.

Question 116

formula to find the par swap rate if there are 3 years

Answer 116

1 = (s3 / (1 + z1)) + ((s3 / (1 + z2)^2) + ((s3 + 1) / (1 + z3)^3)) s3 being the par swap rate for 3 years

Question 117

ssuming that put-call parity holds, a short put position can most likely be replicated by: A selling a call, shorting the underlying asset, and lending at the risk-free rate. B buying a call, shorting the underlying asset, and lending at the risk-free rate. C buying the underlying asset, selling a call, and borrowing at the risk-free rate.

Answer 117

C buying the underlying asset, selling a call, and borrowing at the risk-free rate. put-call parity formula: S0 + p0 = c0 + X / (1 + r)^T S0 = the value of the underlying asset today p0 = today's put price c0 = today's call price X / (1 + r)^T = a zero-coupon risk-free bond maturing at time T Note that a long bond position is equivalent to lending at the risk-free rate, while a short bond position is equivalent to borrowing at the risk-free rate. To replicate a long put, we can rearrange the above formula as follows: p0 = c0 + X / (1 + r)^T - S0 A short put can be replicated by switching the sign for each variable in the rearranged formula: -p0 = - c0 - X / (1 + r)^T + S0 To replicate a short put position, buy the underlying asset, sell a call, and borrow at the risk-free rate.

Question 118

A real estate fund that speculates on improving market conditions is most likely: A a finite-life fund. B an open-end fund. C pursuing a core-plus real estate strategy.

Answer 118

A a finite-life fund. Funds that pursue opportunistic real estate strategies accept the highest level of risk, including speculating on significant improvements in market conditions. These funds typically adopt a closed-end structure and have finite lives.

Question 119

Which of the following would most appropriately be classified as a liquidity constraint? A A 5% policy weight for short-term government securities B A plan to pay for a child's post-secondary education in five years C A reduction in the allocation to thinly-traded high-yield bonds based on short-term capital market expectations

Answer 119

B A plan to pay for a child's post-secondary education in five years Liquidity constraints are expected or unanticipated spending needs to be covered by portfolio withdrawals. An allocation to short-term government securities, or any other asset class, would be specified in the strategic asset allocation. Adjustments to the weight of an asset class such as high-yield bonds based on short-term capital market expectations is an example of a tactical asset allocation.

Question 120

Master limited partnerships (MLPs) that invest in infrastructure projects are most likely: A taxable entities. B publicly-traded pass-through securities. C owned entirely by their limited partners.

Answer 120

B publicly-traded pass-through securities. Infrastructure MLPs are publicly-traded securities like real estate investment trusts (REITs) that are generally free to distribute their cash flows to their limited partners. Limited partners typically own most of the MLP, but a small share is typically held by a general partner who manages the MLP in exchange for a fee. Regulations vary among jurisdictions, but taxes are typically applied at the investor level rather than the MLP level.

Question 121

Anchor Inc. is a newly formed business that has not yet begun producing or selling any products. The company first needs to raise funds to be able to perform some initial market research regarding their product ideas. Any investments that the company receives during this formative stage would most accurately be classified as: A an angel investment. B seed-stage financing. C early-stage financing.

Answer 121

B seed-stage financing. Seed-stage investments, or seed capital, typically support activities such as product development and initial market research. Early stage financing, or early-stage venture capital, is provided to companies moving toward operation but before commercial production and sales have occurred. Angel investing is capital provided at the idea stage, often to transform an idea into a business plan.

Question 122

The persistence of closed-end investment fund discounts is most likely attributable to: A transaction costs. B management fees. C restrictions against trading closed-end funds in the secondary market.

Answer 122

A transaction costs. Closed-end investment fund discounts do exist, but it is often difficult for investors to exploit these differences because of the high transaction costs associated with purchasing all the shares in order to liquidate. There is no evidence to support the claim that these discounts are attributable to management fees. Closed-end investment funds do trade in the secondary market.

Question 123

A global depository receipt (GDR) issued by a German auto parts manufacturer will most likely trade on equity markets in: A Japan. B the United States. C Germany and the United States.

Answer 123

A Japan. Global depository receipts do not trade on exchanges that are based in either the United States or the issuer's home country. In this example, the German company's GDRs will most likely trade on exchanges in Japan.

Question 124

An analyst considers the following methods of calculating the duration of a bond portfolio: Method 1: The weighted average time to receipt of aggregate cash flows Method 2: The weighted average duration of individual bonds Which of the following is most likely to be cited as an advantage of using Method 1 rather than Method 2? A Method 1 is easier to use in practice B Method 1 is grounded in financial theory C Method 1 is preferred if the portfolio includes floating-rate bonds

Answer 124

B Method 1 is grounded in financial theory An advantage of the weighted average time to cash flows approach is that it is theoretically correct. However, it requires more complex calculations and is difficult to use. Additionally, because this method is based on the assumption that the timing and amount of future cash flows are known with certainty, it is not appropriate to use for portfolios that contain floating-rate bonds or bonds with embedded options.

Question 125

company seeking a derivative instrument that will qualify for hedge accounting treatment while offsetting the currency risk attributable to the equity of a foreign subsidiary will most likely use: A a currency swap. B currency futures contracts. C currency options contracts.

Answer 125

A a currency swap. To qualify for hedge accounting treatment, a derivative instrument must closely match the characteristics of the asset, liability, or transaction that it is meant to hedge. Companies typically use customizable over-the-counter derivatives like currency swaps rather than exchange traded derivatives such as futures and options.

Question 126

SLV plans to adjust its capital structure, currently all-equity, to consist of 30% debt and 70% equity by issuing debt and use the proceeds to purchase back an equivalent amount of equity. At present, SLV’s cost of equity is 8%, and the before-tax cost to borrow the funds required to implement its plan is 6%. The marginal tax rate is 35%. The firm is assumed to have annual operating profits (EBIT) that will remain constant in perpetuity. Based on the MM propositions with corporate taxes, SLV’s cost of equity after the planned capital structure adjustment is closest to: A 8.39%. B 8.56%. C 9.76%. how do you answer this question?

Answer 126

B 8.56%. The cost of equity for an all-equity firm such as SLV is denoted as r0. By taking on debt, the firm will increase its risk and investors will require a higher return on equity (re), which can be calculated using the following formula: re = r0 + (r0 - rd) * (1 - t) * (D /E) rd = the before-tax cost of debt t = tax-rate D = the value of debt in the firm's capital structure E = the value of equity in the firm's capital structure in this example: re = 0.08 + (0.08 - 0.06) * (1 - 0.35) * (0.3/0.7)

Question 127

Compared to perfectly competitive markets, a benefit of monopolistic competition is least likely that: A firms have an incentive to innovate. B consumers gain access to a wider variety of products and services. C successful firms are able to earn a positive economic profit over the long-run.

Answer 127

C successful firms are able to earn a positive economic profit over the long-run. Monopolistic competition is characterized by product differentiation, which provides consumers with the variety of products and services that they seek. Product differentiation also gives firms an incentive to innovate experiment with new products or services, which is a benefit that a perfect competition market structure does not provide. However, because of the low barriers to entry and exit, it is not possible for firms in a monopolistically competitive market to earn a positive economic profit over the long-run.

Question 128

homas Nolte, CFA, works for an investment firm and has a large roster of clients who are personally loyal to him based on years of dedicated service. Nolte has made plans to start his own investment firm, which will directly compete with his employer. He expects most of his clients will follow him. Before giving notice of his departure, and without notifying his employer, he submits the appropriate regulatory papers required to start his own firm. Has Nolte most likely violated the Standards? A No B Yes, by failing to notify his employer that he has submitted regulatory papers C Yes, by making plans to compete with his employer before giving notice of his departure

Answer 128

A No Standard IV(A) Loyalty states that "in matters related to their employment, Members and Candidates must act for the benefit of their employer and not deprive their employer of the advantage of their skills and abilities, divulge confidential information, or otherwise cause harm to their employer." In this example, Nolte is not actively soliciting clients. Instead, he is just making preparations to set up his own shop. There is no violation of this Standard as long as the activity does not distract him excessively from his current position and is done on his own time.

Question 129

Which of the following is most accurate with respect to the ability to support debt for a company in the start-up stage? A Debt is a negligible component of the capital structure. B Companies have the ability to support low-cost debt, typically on an unsecured basis. C Companies use debt cautiously to preserve flexibility and minimize the risk of financial distress.

Answer 129

A Debt is a negligible component of the capital structure. When a company is in the start-up stage, revenues are minimal, and the risk of business failure is high. To raise capital, debt is typically not available or is very expensive due to the financial characteristics in that stage (minimal revenue, unpredictable cash flows, high business risk). Thus, debt is a negligible component of the capital structure for most start-up companies, and the company will raise equity rather than debt. Equity is sourced privately, such as through venture capital.

Question 130

Free cash flow to equity (FCFE) is calculated using the following formula:

Answer 130

FCFE = CFO - FCInv + Net Borrowing CFO = cash flow form operations FCInv = fixed capital investment Net borrowing = new borrowing ;ess debt repayments CFO can be calculated using the following formula: CFO = NI + NCC - WCinv NI = Net income NCC = non-cash charges (such as depreciation) WCInv = working capital Invesment

Question 131

CFO can be calculated using the following formula:

Answer 131

CFO = NI + NCC - WCinv NI = Net income NCC = non-cash charges (such as depreciation) WCInv = working capital Invesment

Question 132

n analyst’s report includes the following comment: "When calculating the correlation between two variables in a linear regression with one independent variable, the numerator is the covariance and the denominator is the standard deviation of the independent variable." The analyst’s comment describing the formula for calculating correlation is most likely: A correct. B incorrect with respect to the numerator. C incorrect with respect to the denominator.

Answer 132

C incorrect with respect to the denominator. The analyst’s description is incorrect because she has excluded the standard deviation of the dependent variable from the denominator. The correlation statistic is calculated using the following formula: r = COVx,y / (sx * sy)

Question 133

Claudia Zanelli, CFA, is an analyst covering the marine transportation sector. Recently, a member of her firm's investment banking department recognized her at a restaurant where she was eating lunch and asked her to change her rating on shares of Intercontinental Shipping Lines (ISL) from "neutral" to "buy." Zanetti agrees to review her most recent report on ISL when she returns to the office. After going over her files, Zanelli could not find any change in the factors supporting the conclusions in her latest report on ISL. She issued a new report that maintained her "neutral" rating on the company's shares and contained no changes from the previous version other than an upward revision to the price target. Has Zanelli most likely violated the Standards? A No B Yes, by agreeing to review her report C Yes, with respect to diligence and reasonable basis

Answer 133

C Yes, with respect to diligence and reasonable basis Standard V(A) - Diligence and Reasonable Basis requires members and candidates to have "a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action." In this example, Zanelli could not find any change in the factors supporting the conclusions in her latest report, which included a target price and a "neutral" rating. Therefore, she lacks a reasonable basis for making an upward revision to ISL's price target.

Question 134

in a regression, how do you calculate the slope coefficient?

Answer 134

b1 = COVx,y / Varx Varx = variance of the independent variable

Question 135

Which of the following statements is most accurate? Interim financial reports: A are audited and include the four basic financial statements. B are not audited and include the four basic financial statements. C are audited and included only the income statement and balance sheet.

Answer 135

B are not audited and include the four basic financial statements. Interim financial reports generally present the four basic financial statements (as well as the accompanying condensed notes) but are not audited.

Question 136

operating cash flow formula from the following: Accounts receivable (1 January) $100 million Accounts receivable (31 December) $150 million Inventory (1 January) $100 million Inventory (31 December) $100 million Accounts Payable (1 January) $100 million Accounts Payable (31 December) $50 million Net income $500 million Depreciation expense $50 million

Answer 136

Net Income + Depreciation expense - Increase in accounts receivable + Decrease in inventory - Decrease in accounts payable = Operating cash flow

Question 137

In order to calculate cash paid to suppliers, what are the steps?

Answer 137

1. we must first calculate the purchases from suppliers: Ending Inventory + COGS - Beginning Inventory = Purchases from suppliers 2. Calculate cash paid to suppliers: Beginning Accounts Payable + Purchases from suppliers - Ending Accounts Payable = Cash paid to suppliers

Question 138

Miranda Lambert, CFA, has five clients who have asked her to follow a large-cap value investment style. Two years ago, Lambert created a composite based on these accounts and she regularly refers to its historical returns in her marketing materials. In recent years, the returns for the large-cap value composite have been significantly higher than those posted by Lambert's other composites. In meetings with prospective clients for whom a large-cap investment style is appropriate, Lambert refers only to the large-cap value composite unless the prospective client asks about other investment styles. Has Lambert most likely violated the Standards? A No B Yes, in her meetings with prospective clients C Yes, by distributing her firm's marketing materials

Answer 138

A No According to Standard III(D) - Performance Presentation, members and candidates are required to ensure that their communications present performance information in a manner that is "fair, accurate, and complete." Standard I(C) - Misrepresentation prohibits members and candidates from knowingly making "any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities." Lambert has not violated either of these Standards in this example. She does not violate them by referring to the large-cap value composite's historical performance in her marketing materials as there is no indication that such references are misleading, unfair, inaccurate, or incomplete. It is not a violation of the Standards for Lambert to refer only to the performance of the large-cap value composite when meeting with prospective clients for whom this investment style has been deemed appropriate. She would likely be obligated to refer to the performance of her other composites if prospective clients wanted to discuss the associated styles, and it appears that this is what she does.

Question 139

Judith Bollinger, CFA, is an analyst with Hamlin Brothers, a full-service international bank. For the past six weeks, Bollinger was a key member of a team that prepared a prospectus for an initial public offering being underwritten by Hamlin Brothers. Bollinger is confident that the offer price recommended by the team, which included several members of the investment banking department, is a fair reflection of intrinsic value based on rigorous analysis and internal discussions. Shortly before the prospectus was due to be sent to clients, Bollinger discovered that the team had not been given access to data that would have affected her price recommendation. Bollinger ensures that her name is not included in the report before it is distributed to potential investors and later refers all inquiries to other team members. Has Bollinger most likely violated the Standards? A Yes, with respect to knowledge of the law B Yes, with respect to independence and objectivity C No, because she had her name removed from the report before it was distributed

Answer 139

A Yes, with respect to knowledge of the law Standard I(A) - Knowledge of the Law requires members and candidates to actively dissociate from any violation of laws, rules, or regulations of which they become aware. In this case, it is not sufficient for Bollinger to simply have her name removed from the prospectus, she must take steps to prevent the prospectus from being distributed. This requirement is established by Standard V(B) - Communications with Clients and Prospective Clients, which states that members and candidates must "use reasonable judgment in identifying which factors are important to their investment analyses, recommendations, or actions and include those factors in communications with clients and prospective clients." At a minimum, Bollinger should have discussed this matter with her firm's legal and/or compliance departments. Bollinger has not violated Standard I(B) - Independence and Objectivity, which does not prohibit analysts from working with investment bankers in their firm. In this example, Bollinger appears to have maintained her independence and objectivity while reaching a consensus offer price based on the information that was available to her at the time.

Question 140

A company that had previously held annual elections to fill all of its board positions recently changed this policy and now elects one-third of its directors to three-year terms at each AGM. Which of the following statements is most accurate? By changing how board members are elected, the company is more: A likely to adopt a poison pill. B responsive to the interests of its shareholders. C consistent with corporate governance best practices.

Answer 140

A likely to adopt a poison pill. With annual elections, all board positions are voted on by shareholders each year. With staggered elections, not all directors face re-election annually. In this example, it would take three years to replace the entire board. Corporate governance best practices are supportive of annual elections because this system is seen as being more responsive to the interests of shareholders. Members of staggered boards are more likely to become entrenched in their positions and advocate for the interests of management over those of shareholders. Specifically, staggered boards may be more likely to adopt shareholders' rights plans that make it more difficult for the company to be acquired. Such shareholders' rights plans are known as poison pills.

Question 141

hich of the following metrics is most likely to be classified as a lagging indicator of economic activity? Indicator 1: Inventory-to-sales ratio Indicator 2: Average duration of unemployment A Indicator 1 only B Indicator 2 only C Both Indicator 1 and Indicator 2

Answer 141

C Both Indicator 1 and Indicator 2 Both metrics are lagging indicators. The inventory-to-sales ratio tends to rise near the top of the business cycle, as firms have yet to scale back their inventory purchases but sales have already started to slow. At the other end of the business cycle, decreases in the inventory-to-sales ratio may not be noticed until after a recovery has already taken hold. Average duration of unemployment is also a lagging indicator because firms tend to resist layoffs until it is clear that the economy is in a downturn and hold off from full-time rehiring until after it is clear that the economy is experiencing a genuine recovery.

Question 142

Which of the following indicators would be most appropriate to use in a forecast of the US economy's performance over the next year? A S&P 500 Index B Average bank prime lending rate C Commercial and industrial loans outstanding

Answer 142

A S&P 500 Index Leading economic indicators are most appropriate to use for economic forecasts. The S&P 500 Index is a leading indicator because stock prices, historically, tend to anticipate economic turning points. The other indicators have less value for forecasting purposes. Changes in the average bank prime rate and commercial and industrial loans outstanding are both lagging indicators.

Question 143

A firm offers credit terms of 1/15, net 30. If the customer pays on the 19th day, the cost of trade credit is closest to: A 100%. B 125%. C 150%. What is the formula for the cost of trade credit?

Answer 143

The cost of trade credit can be calculated using the following formula: ( (1 + Discount / (1 - Discount)) ^ (365 / Days beyond discount period) ) - 1

Question 144

ll else equal, the real exchange rate (quoted in domestic currency / foreign currency) will most likely decrease due to an increase in the: A foreign price level. B domestic price level. C nominal amount of domestic currency units that can be purchased per unit of foreign currency.

Answer 144

B domestic price level. All else equal, a decrease in the real exchange rate could arise from: A decrease in the foreign price level An increase in the domestic price level A decrease in the nominal exchange rate

Question 145

hich of the following transactions would most likely improve a company's solvency? A Issuing debt B Issuing equity C Selling a factory for book value

Answer 145

B Issuing equity Solvency is the ability of a company's assets to cover its liabilities. Selling a factory will have little effect on solvency (unless there are gains or losses, which there are not here), it will simply convert one asset to another (it will increase liquidity, though). Issuing debt will increase assets and liabilities equally. Issuing equity, on the other hand, will increase solvency. Assets (cash) will be increased, and liabilities will remain the same.

Question 146

Bruce Bollinger, CFA, a portfolio manager, is meeting with a client, Rebecca Jansen, for the first time. During the course of the meeting, Bollinger describes several possible investment strategies and recommends a stock that has a low correlation with the asset classes in the partial list of assets that Jansen has provided. Has Bollinger most likely violated the Standards? A No B Yes, with respect to suitability C Yes, with respect to suitability and loyalty, prudence, and care

Answer 146

C Yes, with respect to suitability and loyalty, prudence, and care Standard III(C) - Suitability requires members and candidates who are in an advisory role to make "a reasonable inquiry into a client’s or prospective client’s investment experience, risk and return objectives, and financial constraints prior to making any investment recommendation or taking investment action." This Standard further requires members and candidates to "determine that an investment is suitable to the client’s financial situation and consistent with the client’s written objectives, mandates, and constraints before making an investment recommendation or taking investment action." In this example, Bollinger has recommended a specific stock during his initial meeting with Jansen - before he could possibly have developed an investment policy statement or acquired a sufficient understanding of her objectives and constraints. Bollinger has also violated Standard III(A) - Loyalty, Prudence, and Care by failing to consider Jansen's entire portfolio before making an investment recommendation. He has only seen the partial list of assets that she has provided in this initial meeting.

Question 147

David Antonelli, CFA, is an equity analyst covering the pharmaceutical sector for a large investment firm. While attending a conference, Antonelli overhears senior executives of one of the firms that he covers discussing the promotion of a mid-level executive. This recently promoted executive has mentioned her desire to increase the company's revenues from generic drugs in conversations with Antonelli. Upon returning to his office, Antonelli decides to do some additional research on that company and determines that the company is going to expand its presence in the market for generic drugs. Based on this research, Antonelli changes his recommendation on the company's stock to “strong buy" and significantly increases his earnings forecast. Has Antonelli most likely violated the Standards? A No B Yes, with respect to diligence and reasonable basis C Yes, with respect to material nonpublic information

Answer 147

A No Standard II(A) - Material Nonpublic Information prohibits members and candidates from acting on or causing others to act on information that is both material and nonpublic. In this example, Antonelli has learned about the promotion of a mid-level executive, which may be nonpublic information, but is not material on its own. He knows from previous conversations that this executive has advocated a certain strategy - information that may be nonpublic, but is also not material on its own. In short, there is no evidence that Antonelli has violated this Standard, and his process appears to be consistent with the mosaic theory. Additionally, Antonelli has not violated Standard V(A) - Diligence and Reasonable Basis, which requires members and candidates to have a "reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action." There is no evidence that he failed to exercise proper diligence in conducting the research supporting his updated conclusions.

Question 148

Brian Orton, CFA, runs a small investment management firm and lacks the resources to hire his own research analysts. As a cost-effective alternative, Orton obtains third-party research reports and sends full, unedited versions of selected reports to clients in envelopes displaying his firm's logo. In each envelope, Orton includes a letter, written on his firm's letterhead, in which he shares his comments on each of the enclosed reports. Based on his initial research and ongoing scrutiny, Orton believes that the research reports he sends to clients have an adequate basis, although he does not always agree with their conclusion. Has Orton most likely violated the Standards? A No B Yes, with respect to misrepresentation C Yes, with respect to diligence and reasonable basis

Answer 148

A No Standard I(C) - Misrepresentation prohibits members and candidates from taking credit for work that they have not done. There is no indication that Orton has claimed to be the author of the reports that he sends to his clients. He does not violate this Standard by sending these reports in envelopes displaying his firm's logo or by including a letter with his comments on his firm's letterhead. Orton does not appear to have violated Standard V(A) - Diligence and Reasonable Basis as it is noted that he researched the providers before choosing them and conducts ongoing scrutiny of their work. He is not required to agree with the conclusions of all (or any) reports that he sends to his clients, as long as he believes that they have an adequate basis.

Question 149

Which of the following statements is most accurate? A correlation coefficient of zero allows us to conclude that two random variables: A have no linear or non-linear relationship. B are necessarily independent of each other. C may have a significant non-linear relationship.

Answer 149

C may have a significant non-linear relationship. Two random variables are independent if there is no linear or non-linear relationship. By contrast, correlation coefficients only address linear relationships. Two independent variables with zero correlation may still have a significant non-linear relationship.

Question 150

The t-statistic for population mean can be calculated as:

Answer 150

t = (Sample Mean - Population Mean) / (s / sqrt(n))

Question 151

Keagan Fahey, CFA, is a research analyst for Omega Securities. Fahey is personally exposed to several of the stocks that he covers by virtue of being the sole beneficiary of a trust in which his parents have placed significant holdings of several diversified mutual funds. The terms of the trust specify that Fahey receives monthly statements that include a full listing of its assets and the current market value of each, but that he cannot exercise any control over these assets until after both of his parents have died. Fahey has not disclosed his beneficial ownership of the trust's assets in any of his research reports. Has Fahey most likely violated the Standards? A Yes B No, because the assets are held in trust C No, because of the nature of the assets held in trust

Answer 151

C No, because of the nature of the assets held in trust Standard VI(A) - Disclosure of Conflicts requires members and candidates to "make full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity." For example, an individual would violate this Standard by failing to disclose a beneficial ownership position in a stock that he or she covers. However, in this example, Fahey is not required by this Standard to disclose the positions he has obtained by virtue of being the beneficial owner of various diversified mutual funds. The fact that the assets are held in trust does not, on its own, eliminate the need to disclose. Although Fahey cannot exercise any control over these assets until after both of his parents have died, as a sole beneficiary of the trust, he would be required to disclose his beneficial ownership if the trust held individual stocks instead of mutual funds.

Question 152

From an bondholder’s perspective, interest payments on debt are most likely: A discretionary and tax-deductible. B non-discretionary and tax-deductible. C non-discretionary and not tax-deductible.

Answer 152

C non-discretionary and not tax-deductible. Unlike discretionary distributions to shareholders, payments to bondholders are contractual obligations. Although interest payments on debt are tax deductible for the issuer, they represent taxable income from a bondholder’s perspective.

Question 153

A risk is most accurately classified as exogenous if it: A is sudden and unanticipated. B is known and evolves over time. C originates beyond a country’s borders.

Answer 153

A is sudden and unanticipated. Exogenous risks are sudden and unanticipated, including black swan events that are important but difficult to predict because they occur so rarely. They may arise domestically or they may originate beyond a country's borders. A risk that is known and evolves over time is described as a thematic risk.

Question 154

Which of the following company's is most accurately classified as a value added reseller? A ABC Corp. earns royalties from operators that have paid for the right to sell the products that it has developed B KLM Corp. provides installation and maintenance services for the large excavating machinery that it manufactures C XYZ Corp. designs and markets personal electronic devices that are manufactured by third-party firms in countries with low labor costs

Answer 154

B KLM Corp. provides installation and maintenance services for the large excavating machinery that it manufactures A value added reselling model is typically used by firms that provide services such as installation and after-sales maintenance for their relatively complex products. A company that earns royalties from operators with the exclusive right to sell its products is a franchisor. Outsourcing the production of internally-developed products is part of a contract manufacturing business model.

Question 155

The Public Company Accounting Oversight Board was most likely created by the: A Securities Act of 1933. B Sarbanes-Oxley Act of 2002. C Securities Exchange Act of 1934.

Answer 155

B Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act followed a series of high-profile accounting scandals. The intent of this legislation was to protect the integrity of auditors' opinions. To this end, the act created the Public Company Accounting Oversight Board, which oversees the work of auditors.

Question 156

Janet Hill works for a large bank and recently took the Level III CFA exam. While awaiting her results, Hill updates her profile on her firm's website by adding the following statement: "In working toward my CFA charter, which I will be eligible to receive after completing the required four years of eligible work experience, I have significantly expanded my knowledge of derivatives and improved my ability to serve customers." Has Hill most likely violated the Standards? A Yes B No, because she does not exaggerate the meaning of her participation in the CFA Program C No, because she has accurately stated the number of years of eligible work experience required to obtain a CFA charter

Answer 156

A Yes Hill violates Standard VII(B) - Reference to CFA Institute, the CFA Designation, and the CFA Program, by claiming that she will be eligible to receive her CFA charter upon meeting the eligible work experience requirement before learning whether or not she has passed the Level III CFA exam.

Question 157

Companies that offer defined benefit pension plans most likely meet their obligations to retired employees: A indirectly through a legally distinct entity. B directly from internally-generated cash flows. C directly from funds that have been contributed by current plan participants.

Answer 157

A indirectly through a legally distinct entity.

Question 158

Trade-off theory

Answer 158

seeks to balance the value-enhancing effects of debt on a firm's capital structure (i.e., debt tax shield) with the value-reducing effects (i.e., financial distress, agency costs).

Question 159

Accounting for the value-reducing effects, the value of the levered firm becomes:

Answer 159

VL = VU + PV (Interest tax shield) - PV (Financial Distress costs) - PV (agency costs of debt)

Question 160

how to find the number of days payable

Answer 160

1. find payables turnover ratio Payables Turnover = COGS / average trade payables 2. Days payable = Days in Period / Payables turnover

Question 161

The value effect anomaly most likely refers to abnormally higher returns earned by investors who hold stocks with above-average: A dividend yields. B market-to-book ratios. C price-to-earnings ratios.

Answer 161

A dividend yields. The value effect anomaly is present if investors can consistently earn abnormal returns by holding value stocks, which are characterized by below-average market-to-book and price-to-earnings ratios and above-average dividend yields.

Question 162

hich of the following statements is most accurate? For two interest rate futures contracts to have the same basis point value: A it is only necessary that they have the same notional value. B they must have the same notional value and their market reference rates must be at the same level. C they must have the same notional value and their market reference rates must have the same periodicity.

Answer 162

C they must have the same notional value and their market reference rates must have the same periodicity. The basis point value (BPV) of an interest rate futures contract is calculated as follows: Futures Contract BPV = Notional Principal * 0.0001 * Period In the above formula, the term for Period refers to the portion of the year covered by the term of the MRR. For example, the Period value for a six-month MRR is 0.5. Two interest rate futures contracts with the same notional and reference rates with the same periodicity will have the same basis point value.

Question 163

The basis point value (BPV) of an interest rate futures contract is calculated as follows:

Answer 163

Futures Contract BPV = Notional Principal * 0.0001 * Period In the above formula, the term for Period refers to the portion of the year covered by the term of the MRR. For example, the Period value for a six-month MRR is 0.5.

Question 164

A municipal government issues bonds to finance the construction of a recreation complex. Proceeds from admission fees are directed to meet the bond obligations. This type of security structure is most accurately described as a: A revenue bond. B sovereign bond. C general obligation bond.

Answer 164

A revenue bond. Revenue bonds are secured by a new revenue stream generated by a specific project, such as the swimming pool in this case. Funds used to repay general obligation bonds are taken from the municipality's revenue pool sources such as property taxes, not from the revenues generated by a specific project. Sovereign bonds are issued by national governments, not municipal governments.

Question 165

long-term sustainable growth rate (g):

Answer 165

g: retention ratio * return on equity

Question 166

In over-the-counter derivatives markets, the market making function is most likely provided by: A banks. B a clearinghouse. C a central counterparty.

Answer 166

A banks. OTC derivatives markets lack standardized contracts, which makes it difficult for market participants to find counterparties. Financial intermediaries, such as commercial and investment banks, act as dealers, taking the opposite side of contracts with derivatives end users and then typically making offsetting trades to avoid excessive exposure to various risks. While regulators are increasingly requiring OTC derivatives markets to have a central counterparty, their role is to limit credit risk and not to act as market makers. Clearinghouses are used to guarantee performance and provide clearing and settlement functions in exchange-traded derivatives markets.

Question 167

Which of the following statements is most likely correct? A Options payoffs are non-linearly related to the payoffs of the underlying B Options and swap payoffs are linearly related to the payoffs of the underlying C Options and forwards payoffs are linearly related to the payoffs of the underlying

Answer 167

A Options payoffs are non-linearly related to the payoffs of the underlying Options are referred to as contingent claims which provide payoffs that are non-linearly related to the underlying. Forwards are referred to as forward commitments, which provide payoffs that are linearly related to the underlying. A swap is a series of forward commitments, which provides payoffs that are linearly related to the underlying.

Question 168

Compared to participants in defined contribution pension plans, employees who participate in a defined benefit pension plan most likely: A have greater income needs. B accept less investment risk. C have more ability of develop an optimal asset allocation.

Answer 168

B accept less investment risk. Participants in defined contribution (DC) pension plans are entirely responsible for choosing their optimal asset allocation and accept all investment risk. By contrast, participants in defined benefit (DB) pension plans have no ability to determine the allocation of plan assets and accept no investment risk because their promised benefits are defined. It is not possible to make any conclusions about the income needs of DB plan members relative to those of DC plan members as each individual participant in either type of plan will have his or her own individual income needs.

Question 169

From the perspective of an equity issuer, the advantage of issuing shares as part of a shelf registration is most likely: A lower disclosure requirements. B minimizing the potential for negative price impact. C the opportunity to sell directly in the primary market.

Answer 169

B minimizing the potential for negative price impact. The structure of shelf registration allows issuers to sell securities in increments over time, rather than selling all securities in an issue at one time. This ability to control the amount and timing of sales allows the issuer to minimize the potential for negative price impact associated with a large increase in supply. Making securities available as part of a shelf registration does not reduce the issuer’s disclosure requirements. Also, all transactions resulting from a shelf registration take place in the secondary market, not the primary market.

Question 170

Based on put-call parity, a combination of a short put, a long call and a long bond will most likely create a synthetic: A asset. B potective put. C fiduciary call.

Answer 170

A asset. by the put-call parity: s0 + p0 = c0 + (X / ((1 + r)^T)) re-arrange the equation to: s0 = -p0 + c0 + (X / ((1 + r)^T)) Thus, the combination of a short put, a long call and a long position with a bond can create a synthetic long asset.

Question 171

Which of the following pricing models is most accurately classified as a type of price discrimination? A Auctions B Fractionalization C Penetration pricing

Answer 171

A Auctions Auctions are a type of price discrimination because different customers are charged different prices for the same service based on the willingness to pay. Fractionalization is an alternative to full ownership that involves dividing an asset into smaller units. Penetration pricing is a strategy based on charging a discounted price for an initial period in order to establish sufficient scale and market share.

Question 172

Which type of forward commitment is least likely to be traded in over-the-counter markets? A Swaps B Futures C Forwards

Answer 172

B Futures Futures contracts are traded on organized exchanges. Swaps and forward contracts are traded over-the-counter.

Question 173

Common stock is most accurately described as a claim on a company's: A assets. B net assets. C unsecured assets.

Answer 173

B net assets. A company's assets are financed with either debt (liabilities) or equity. This can be formally expressed as the accounting formula: Assets = Liabilities + Equity. So, while both equity holders and debtholders have claims to a company's assets, the claims of debtholders rank above those of equity holders. More specifically, equity ownership in the form of common stock represents a residual claim to the value of all assets above and beyond the priority claims of debtholders. Therefore, it is most accurate to say that common stock represents a claim on a company's net assets.

Question 174

Which of the following is least likely to be included among the effects of securitization on financial markets? A An increased role of intermediaries B Additional funds available for lending C Greater liquidity for the underlying loans

Answer 174

A An increased role of intermediaries Securitization lessens the role of intermediaries. It removes the wall between ultimate investors and originating borrowers. Securitization allows for the creation of the tradable securities with better liquidity than the original loans on the bank’s balance sheet. This has the additional effect of allowing banks to increase the supply of funds available for lending.

Question 175

The formula for money market instruments with an add-on rate is:

Answer 175

PV = FV / (1 + Days/Year * AOR)

Question 176

The formula for money market instruments with a discount rate is:

Answer 176

PV = FV * (1+ 90/Year * Dr)

Question 177

With respect to the lockout period of the credit card receivable-backed securities, which of the following statements is most accurate? A After the lockout period, principal payments will be reinvested in the pool B During the lockout period, the cash flow that is paid out to security holders is based only on principal payments received C During the lockout period, the cash flow that is paid out to security holders is based only on finance charges collected and fees

Answer 177

C During the lockout period, the cash flow that is paid out to security holders is based only on finance charges collected and fees

Question 178

nvestors are most likely to use both fixed-income and equity indices based on: A credit quality. B economic sector. C market capitalization.

Answer 178

B economic sector. There are sector indices for both equities and fixed-income securities. Choice A is incorrect because credit quality is a characteristic used only in the construction of fixed-income indices. Choice C is incorrect because market capitalization is a characteristic used only in the construction of equity indices.

Question 179

Which feature of an investment partnership is most likely to serve the interests of limited partners? A Catch-up clause B American waterfall C High-water mark clause

Answer 179

C High-water mark clause A high-water mark clause protects limited partners from paying incentive fees on gains that bring the fund back up a previous peak. In other words, LPs will not pay twice for the same performance. A catch-up clause serves the interests of general partners by allowing them to take 100% of gains above their hurdle rate until they have earned their full share of their fund’s profits. A waterfall is used to distribute a fund’s profits among the general and limited partners. An American waterfall is preferred by general partners because it allows them to earn performance fees on a deal-by-deal basis rather than based on the results of all deals over a given period.

Question 180

A corporate bond's yield spread is most likely to reflect: A default risk and interest rate risk. B market liquidity risk and interest rate risk. C credit migration risk and market liquidity risk.

Answer 180

C credit migration risk and market liquidity risk. A bond's yield spread relative to a risk-free reference rate is primarily influenced by the bond's credit migration risk and market liquidity risk.

Question 181

ssuming it is trading at its par value, an option-free bond's duration is most likely: A positively related to both its coupon rate and time-to-maturity. B inversely related to its coupon rate and positively related to its time-to-maturity. C inversely related to its coupon rate and positively related to its yield-to-maturity.

Answer 181

B inversely related to its coupon rate and positively related to its time-to-maturity. An option-free bond's duration can be affected by three variables – coupon rate, yield-to-maturity, and time-to-maturity. Two of these factors – higher yield-to-maturity and higher coupon rate, are inversely related to duration. In contrast, as time-to-maturity increases, duration increases.

Question 182

An investor creates two positions - a protective put and a fiduciary call. All options are European-style and have the same strike price and time to expiry. Assuming that put-call forward parity holds and the call option expires in-the-money, the payoff of a protective put is most likely: A less than the payoff of a fiduciary call. B equal to the payoff of a fiduciary call. C greater than the payoff of a fiduciary call.

Answer 182

B equal to the payoff of a fiduciary call. According to put-call forward parity, the payoff of the protective put (long put, long asset) with a long forward contract is the same as the payoff of a fiduciary call (long call, long risk-free bond).

Question 183

Which of the following is least likely to be included among the elements of a value at risk measure? A A probability B A time period C An estimated maximum loss stated in units of currency

Answer 183

C An estimated maximum loss stated in units of currency A value at risk (VaR) measure includes three elements: a probability, a time period, and a minimum possible loss stated in units of currency.

Question 184

he widespread adoption of permissionless networks in the investment industry has most likely been limited due to the: A immutability of transaction records. B lack of trust between counterparties. C inability of participants to perform all network functions

Answer 184

A immutability of transaction records.

Question 185

Rebekah Woodham, a hedge fund manager, values the assets in the hedge fund using a mark-to-model valuation. The valuation performed by Woodham most likely: A overstates the return volatility. B uses observable transaction prices. C produces returns that are smoothed or overstated.

Answer 185

C produces returns that are smoothed or overstated. Assets that can only be modeled on a "mark-to-model" basis are so illiquid that no reliable market values are available. The model does not reflect a true liquidation value since estimates, rather than observable transaction prices, are used. As a result, returns may be smoothed or overstated and the return volatility may be understated.

Question 186

A relative value hedge fund strategy is most likely executed by: A selling the stock of an acquiring company when the acquisition is announced. B buying convertible debt securities and simultaneously selling the same issuer’s common stock. C buying the stock of a company that is expected to show high growth and taking an offsetting short position in a peer company that is expected to underperform.

Answer 186

B buying convertible debt securities and simultaneously selling the same issuer’s common stock. Relative value strategies aim to profit from a pricing discrepancy between related securities. Buying convertible debt securities and simultaneously selling the same issuer’s common stock establishes a position that seeks to exploit perceived mispricing between a convertible bond and its component parts. This is an example of convertible bond arbitrage, which is a relative value strategy. Event-driven strategies seek to profit from specific events. Selling the stock of an acquiring company is an example of merger arbitrage, which is an event-driven strategy. Taking offsetting long and short positions is consistent with a market neutral strategy, which falls into the category of equity hedge strategies.

Question 187

5-year, 5% annual coupon bond is callable after each year. Which of the bond's yield measures is most likely lowest? A Yield-to-worst B Yield-to-maturity C Yield-to-first-call

Answer 187

A Yield-to-worst Depending on the fist call date and the exercise price, yield-to-first-call may be a bond's lowest yield measure, in which case, this would also be the bond's yield-to-worst. Alternatively, yield-to-maturity may be a bond's lowest yield measure, in which case, this would also be the bond's yield-to-worst. However, a callable bond's yield-to-worst measure (the lowest yield for all option possibilities) is always at least as low as any of its other yield measures.

Question 188

Which of the following duration measures is most likely to be used to assess a bond’s sensitivity to changes in the shape of the benchmark yield curve? A Key rate duration B Modified duration C Effective duration

Answer 188

A Key rate duration Key rate duration measures interest rate sensitivities of a bond or portfolio of bonds to shifts in key points along the yield curve. By isolating the impact of changes in certain yields, key rate durations can be used to determine the impact of changes in the shape of the yield curve. Effective duration measures the sensitivity of a bond’s price to a change in the benchmark yield curve. Modified duration measures the percentage price change of a bond given a change in its yield-to-maturity.

Question 189

Which of the following is most likely a source of funds available to sovereign borrowers and inaccessible by non-sovereign issuers? A Taxing citizens B Monetary policy C Dedicated cash flows from infrastructure projects

Answer 189

B Monetary policy Non-sovereign (provincial, regional, state) governments can raise funds to service their debt obligations by, for example, taxing citizens who fall under their jurisdiction or by accessing a stream of cash flows from a project that was financed with debt. However, the authority to print new money by implementing an expansionary monetary policy is limited to sovereign governments.

Question 190

Returns on commodity investments most likely include: A price appreciation only. B both price appreciation and income. C both price appreciation and the real risk-free rate.

Answer 190

A price appreciation only. Returns on commodity investments are based on changes in price alone and do not include an income stream such as interest, dividends, or rent.