V2 Exam 1 PM

CFA Level I

Question #1 of 120 Question ID: 1214547

Questions 1 through 18 relate to Ethical and Professional Standards. (27 minutes)

Ray Brown, CFA, gives prospects his firm's marketing materials, not prepared by him, that indicate he has a graduate degree from State
University, when in fact he did graduate work there but did not receive a degree. Brown informed the marketing department of this error
when he first saw it. Brown has:

A) violated the Standards by misrepresenting his qualifications.

B) not violated the Standards because he has informed his firm of the mistake.

C) not violated the Standards because he did not prepare the marketing materials or
misrepresent his credentials to his firm.

Question #2 of 120 Question ID: 1214562

John Larsen, CFA, is creating his investment firm's initial GIPS-compliant performance results. He would like to supplement the
historical performance numbers with older, non-GIPS-compliant data. According to GIPS, is this allowed?

A) GIPS results cannot include presentation of any noncompliant performance data.

B) After the initial, GIPS-compliant performance results are presented, a firm may go back
further and present non-compliant performance data, but no non-compliant results can be
included for time periods after January 1, 2000.
C) As long as five years of GIPS-compliant performance results are presented, the firm can go
back further and present non-compliant performance data.

Question #3 of 120 Question ID: 1214556

Jenny Pickler, a Level II CFA Candidate, writes an economic forecast containing several interest rate projections. Her firm's investment
committee reviews Pickler's report and changes several of the interest rates Pickler had forecast. To comply with CFA Institute
Standards, Pickler:

A) does not need to take any further action.

B) should ask that her name be removed from the report.

C) is required to independently review the data supporting the investment committee’s changes.
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Question #4 of 120 Question ID: 1214546

Which of the following statements is most accurate about the Standard concerning knowledge of the law? Members and candidates are
responsible for violations:

A) that are proven by a regulatory authority.

B) of which they are aware or should be aware.
C) in which they knowingly participate or assist.

Question #5 of 120 Question ID: 1214549

Andrew Pollard, CFA, overhears two executives from a multinational oil company discussing an unexpectedly large earnings increase
the company is preparing to announce the following morning. When Pollard gets home that evening, he places an order to buy shares in
this oil company. Which of the following best describes this situation?

A) Pollard violated the Standards by acting on material nonpublic information.

B) There is no violation of CFA Institute Standards, since this was simply an overheard
conversation.
C) Pollard violated CFA Institute Standards by not contacting counsel for advice before placing
the trade.

Question #6 of 120 Question ID: 1214548

Recommended procedures for compliance with the Standard concerning misconduct suggest that firms in the investment industry
should:

A) periodically test their employees’ knowledge of applicable laws, regulations, and the firm’s
code of ethics.

B) periodically inform employees of violations that have occurred and the disciplinary actions
that the firm took against the employees involved.
C) check references of potential employees to verify that they are of good character and eligible
for employment in the investment industry.

Question #7 of 120 Question ID: 1214557

Which of the following statements is most accurate? An analyst who changes employers and wants to maintain coverage of a stock:

A) may copy supporting records from the prior firm and use them at the new firm.
B) must re-create the supporting records at the new firm with information from public sources or
from the covered firm.
C) may maintain his recommendations at the new firm without re-creating the supporting
documentation if those recommendations had a reasonable basis.
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Question #8 of 120 Question ID: 1214559

After taking the Level I exam, Willie Winchester posts a comment on a social media website wondering why the exam had no questions
about interest rate risk and currency risk. Winchester has:

A) violated the Code and Standards by discussing the CFA Program on social media.
B) violated the Code and Standards by disclosing confidential information about the exam.
C) not violated the Code and Standards because he did not disclose specific exam questions.

Question #9 of 120 Question ID: 1214552

A member provides a client with an investment performance presentation that does not include detailed information, but reflects the
member's reasonable efforts to present results that are fair, accurate, and complete. Has the member complied with the Standard
related to performance presentation?

A) Yes, the member has met the requirements of the Standard.

B) No, because the performance presentation must comply with Global Investment
Performance Standards.
C) No, because “reasonable efforts” do not ensure that the presentation is fair, accurate, and
complete.

Question #10 of 120 Question ID: 1214554

With regard to independent practice by Members and Candidates who are employed, the Code and Standards specify that:

A) undertaking independent practice includes preparations to begin such practice.

B) written consent must be obtained from both the employer and clients who may be affected.

C) members and candidates contemplating independent competitive business must notify their
current employer of the types of services to be rendered, duration, and compensation.

Question #11 of 120 Question ID: 1214560

Ken Koski, CFA, issues a press release that includes the following statement:

We are proud to announce that two of our managers have earned the right to use the CFA designation. In addition, four of
our junior analysts have become Level III CFA candidates. These individuals have proven their dedication to the investment
community and shown commitment to the highest ethical standards.

With regard to the statements in the press release:

A) all these statements are in compliance with CFA Institute Standards.

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B) Koski has violated the Code and Standards by improperly referencing the managers’ right to
use the CFA designation.

C) Koski has violated the Code and Standards by implying superior performance results.

Question #12 of 120 Question ID: 1214550

Gary Hoskins, CFA, runs a macro strategy hedge fund. The hedge fund has a short position in July osmium futures. Hoskins attempts to
gain control of the available supply of osmium that can be delivered in July, which will cause holders of long July futures to make
offsetting trades instead of settling by delivery. Has Hoskins violated the Standard concerning market manipulation?

A) Yes.
B) No, because Hoskins is executing an arbitrage trade.

C) No, because Hoskins is not manipulating the price of osmium.

Question #13 of 120 Question ID: 1214563

Ed Socho states that in a GIPS-compliant presentation, (1) total firm assets must include all accounts, including non-fee-paying
accounts and accounts where the client makes the investment decisions, and (2) the firm must include the performance results of third-
party advisors selected by the firm in its composite performance. Are Socho's statements accurate?

A) Both of these statements are accurate.

B) Neither of these statements is accurate.

C) Only one of these statements is accurate.

Question #14 of 120 Question ID: 1214558

Isaac Jones, CFA, is a portfolio manager for a major brokerage firm. Jones wishes to buy Maxima common stock for some of his clients'
accounts. Jones also wishes to purchase Maxima for his personal account. In accordance with CFA Institute Standards, Jones may
purchase Maxima for his personal account:

A) only after completing the transactions for his clients.

B) along with the purchases for his clients, as long as this is disclosed in advance to his clients
and employer.
C) at any time, as long as the execution price is not more favorable than the execution price
received by the clients.

Question #15 of 120 Question ID: 1214561

Which of the following statements best describes how GIPS requires portfolios to be grouped into composites?
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A) Composites can include model results, if this is clearly specified.

B) All discretionary portfolios must be included in at least one composite if they are still
managed by the firm.

C) Each composite must include all discretionary portfolios that the firm has managed according
to that particular composite strategy or style, including closed accounts.

Question #16 of 120 Question ID: 1214555

With respect to the responsibilities of supervisors, the Code and Standards state that those with supervisory responsibility:

A) may not delegate supervisory responsibility.

B) are in violation if an employee under their supervision commits securities fraud.

C) must institute procedures to prevent and detect violations of rules and regulations by those
subject to their supervision.

Question #17 of 120 Question ID: 1214553

The Standard concerning suitability recommends that the objectives and constraints of an investment policy statement should be
reviewed at least:

A) annually.

B) twice each year.

C) every two years.

Question #18 of 120 Question ID: 1214551

A member or candidate who changes his recommendation on a stock can comply with the Standards by communicating this change to
clients according to:

A) size of the client.

B) known interest of the client in the stock.

C) number of shares of the stock owned by the client.

Question #19 of 120 Question ID: 1214567

Questions 19 through 30 relate to Quantitative Methods. (18 minutes)

A recent study indicates that the probability that a company's earnings will exceed consensus expectations equals 50%. From this
analysis, the odds that the company's earnings exceed expectations are:
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A) 1 to 2.

B) 2 to 1.
C) 1 to 1.

Question #20 of 120 Question ID: 1214564

Sydney Burns, CFA, is considering the purchase of a bond issued by SubPrime Providers. The bond is highly liquid and has a maturity
equal to that of a long-term Treasury bond. The SubPrime Providers bond carries a default risk premium of 5%. Burns notices that the
difference in interest rates offered on long-term Treasury bonds and short-term Treasury bills currently equals 4%. The real risk-free rate
equals 1% and the expected inflation rate equals 2%. Burns should expect the interest rate on the SubPrime Providers bond to:

A) be greater than or equal to 4%, and less than or equal to 8%.

B) be greater than or equal to 5%, and less than or equal to 9%.

C) be greater than or equal to 7%, and less than or equal to 12%.

Question #21 of 120 Question ID: 1214565

An analyst has calculated the arithmetic, harmonic, and geometric mean using the last 10 years of returns on a stock. Which of these
means should the analyst most appropriately use to forecast next year's return on the stock?

A) Harmonic mean.
B) Geometric mean.
C) Arithmetic mean.

Question #22 of 120 Question ID: 1214566

The histogram of returns data for the Accel Equity Fund has a long left tail and is more peaked than a normal distribution. Based on the
histogram, the distribution of returns for Accel has:

A) positive skewness.
B) negative skewness.

C) negative excess kurtosis.

Question #23 of 120 Question ID: 1214572

A study finds that stocks with low price-to-book-value ratios, using end-of-year stock prices and book values per share, have positive
abnormal returns in January on average. This study most likely suffers from:

A) look-ahead bias.
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B) time-period bias.
C) sample selection bias.

Question #24 of 120 Question ID: 1214575

Jane Wilcott, CFA, is researching whether value stocks can be expected to outperform growth stocks in any given month. Examining 10
years of monthly returns on a value stock portfolio and a growth stock portfolio, Wilcott records a positive sign for any month the return
on the value portfolio exceeded that of the growth portfolio, and a negative sign for any month the return on the value portfolio was less
than that of the growth portfolio. Wilcott tests the null hypothesis that the number of positive months is less than or equal to the number
of negative months. Wilcott's research design is an example of a:

A) paired comparisons test.

B) conditional test.
C) nonparametric test.

Question #25 of 120 Question ID: 1214574

Pat Harris, CFA, examines earnings data for 3 energy companies:

Average per-share

quarterly earnings
Company p-value

Axxon Industries $2.00 0.25

Babson Drilling $0.50 0.04

Cerex Energy $3.00 0.01

Harris is asked to test the hypothesis for each company that mean earnings equal zero. Using a 5% level of significance, Harris should
conclude that the null hypothesis should be rejected for:

A) Babson only.
B) Axxon and Cerex only.

C) Babson and Cerex only.

Question #26 of 120 Question ID: 1214569

An analyst is creating a binomial tree for a stock price based on the following assumptions: the probability of an up move is 62%, the up
factor is 1.15, and the down factor is 1/1.15. The probability that the stock price will be unchanged after two periods is closest to:

A) 24%.

B) 42%.
C) 47%.
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Question #27 of 120 Question ID: 1214571

The continuously compounded annual rate of return that would increase the value of an investment by 20% in three years is closest to:

A) 5.7%.

B) 6.1%.
C) 6.7%.

Question #28 of 120 Question ID: 1214568

On the loading dock of an automobile shipping company, there are 44 blue cars, of which 19 have driver-assist technology; 22 red cars
with driver-assist technology; and 34 red cars without driver assist technology. The probability that a car without driver-assist technology
is blue is:

A) 42.4%.
B) 56.8%.
C) 59.0%.

Question #29 of 120 Question ID: 1214573

To select the correct Student's t-distribution for a hypothesis test, a researcher must identify its:

A) mean and variance only.

B) degrees of freedom only.

C) mean, variance, and degrees of freedom.

Question #30 of 120 Question ID: 1214570

A continuous probability distribution is bounded by –5 and +5. Its cumulative distribution function is:

A) unbounded.
B) bounded by 0 and 1.

C) bounded by –5 and +5.

Question #31 of 120 Question ID: 1214583

Questions 31 through 42 relate to Economics. (18 minutes)

If there is an increase in the quantity of money at full employment, the long-run effects will most likely be:
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A) an increase in the price level and a decrease in real GDP.

B) an increase in the price level and no effect on real GDP.
C) no effect on the price level and no effect on real GDP.

Question #32 of 120 Question ID: 1214586

A spot exchange rate is 8.6145 and the 1-year forward quotation is +0.25%. The 1-year forward quotation on a points basis is closest to:

A) 2.
B) 25.
C) 215.

Question #33 of 120 Question ID: 1214577

Which of the following most likely describes a loss that consumers suffer under an unregulated monopoly compared to a competitive
market?

A) Monopolies produce less goods than a competitive market would.

B) Costs of production are higher with monopolies.

C) Monopolists charge the maximum price.

Question #34 of 120 Question ID: 1214581

The national government has undertaken a plan to combat a recession that includes a fiscal stimulus package. The school of economic
thought most likely to support this action is the:

A) Neoclassical.
B) Keynesian.
C) Monetarist.

Question #35 of 120 Question ID: 1214580

Under the production function approach to modeling economic growth, will growing an economy's amount of physical capital at a
constant rate support long-term economic growth at that rate?

A) No, because physical capital depreciates over time.

B) Yes, because output is a positive function of both labor and capital.

C) No, because physical capital exhibits diminishing marginal productivity.

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Question #36 of 120 Question ID: 1214587

Which of the following statements about the elasticities and absorption approaches to explaining the impact of exchange rate changes
on trade deficits is most accurate?

A) Both the elasticities and absorption approaches consider trade and capital flows.
B) Under the elasticities approach, currency depreciation will result in greater improvement in
the trade deficit when either import or export demand becomes more elastic.
C) Under the absorption approach, depreciation of the domestic currency will improve a trade
deficit if it increases national expenditures relative to income.

Question #37 of 120 Question ID: 1214578

Which model of pricing strategy under imperfect competition requires that firms be able to identify groups of customers that have
different elasticities of demand?

A) Nash equilibrium.
B) Price discrimination.
C) Kinked demand curve.

Question #38 of 120 Question ID: 1214584

An advantage of a common market, relative to a customs union or a free trade area, is that a common market:

A) adopts a single currency.

B) removes barriers to movement of labor and capital.

C) establishes common institutions and economic policy.

Question #39 of 120 Question ID: 1214576

The demand function for a good is QD = 108 – 6PGOOD + 0.9 Income + 0.8 PRELATED GOOD. If the price of the good is 15, income is 80,
and the price of the related good is 20, the good's price elasticity of demand is closest to:

A) –0.4.
B) –0.8.
C) –1.2.

Question #40 of 120 Question ID: 1214585

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At a base period, the CPIs of the countries of Tuolumne (currency is the TOL) and Bodee (currency is the BDE) are both 100, and the
exchange rate is 0.90 BDE/TOL. One year later, the exchange rate is 0.75 BDE/TOL, and the CPI has risen to 110 in Tuolumne and 105
in Bodee. The real exchange rate is closest to:

A) 0.72 BDE/TOL.
B) 0.79 BDE/TOL.

C) 0.83 BDE/TOL.

Question #41 of 120 Question ID: 1214582

According to the quantity theory of money, the most appropriate means to combat inflation is to:

A) reduce the velocity of money.

B) reduce the money supply.
C) increase the excess reserves of banks.

Question #42 of 120 Question ID: 1214579

Compared to a competitive market result, a single-price monopoly will most likely:

A) adopt a marginal cost pricing strategy, which will decrease consumer surplus.
B) result in a higher price, less consumer surplus, and more producer surplus.
C) result in lower output, deadweight loss, and less producer and consumer surplus.

Question #43 of 120 Question ID: 1214641

Questions 43 through 60 relate to Financial Reporting and Analysis. (27 minutes)

Shelby Enterprises recently entered into a new $500 million revolving credit facility. The provisions of the facility require Shelby to repay
the loan before any other debt can be retired. In addition, if the company's debt-to-capital ratio is higher than 1.0 or its equity falls below
$2 billion, Shelby will be prohibited from paying any dividends. Shelby would most likely agree to these covenants because they reduce:

A) risk to bondholders.
B) the company’s interest cost.
C) risk to shareholders.

Question #44 of 120 Question ID: 1214589

The objective of financial statements is best described as:

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A) aiding in the evaluation of potential equity and debt investments.

B) providing economic decision makers with useful information about a firm’s financial
performance and changes in financial position.
C) providing shareholders detailed information about the performance and financial position of
the firm.

Question #45 of 120 Question ID: 1214595

A company understates year-end depreciation. As compared to the properly stated year-end results, what effect will this understatement
have on the company's asset turnover ratio?

A) No impact.
B) Decrease.

C) Increase.

Question #46 of 120 Question ID: 1214602

Deferred taxes must be recognized for undistributed earnings from an investment in an associate firm under:

A) U.S. GAAP only.

B) both IFRS and U.S. GAAP.
C) neither IFRS nor U.S. GAAP.

Question #47 of 120 Question ID: 1214590

Thunderbird Company reported net income of $500 million and the company had 100 million common shares outstanding. In addition,
Thunderbird had 5 million shares of convertible preferred and 10 million outstanding warrants during the year. Each preferred share
pays a dividend of $4 per share and is convertible into three common shares. Each warrant is convertible into one common share at $25
per share. The company's stock traded at an average $50 per share. Thunderbird's diluted earnings per share for the year is closest to:

A) $4.00 per share.

B) $4.20 per share.
C) $4.80 per share.

Question #48 of 120 Question ID: 1214592

Under IFRS, firms may report an investment in the equity securities of other companies at fair value through:

A) profit and loss only.

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B) other comprehensive income only.
C) either profit and loss, or other comprehensive income.

Question #49 of 120 Question ID: 1214588

Declaration and payment of a dividend during the most recent accounting period would be shown on a company's statements of:

A) cash flows and changes in equity.

B) cash flows and comprehensive income.
C) changes in equity and comprehensive income.

Question #50 of 120 Question ID: 1214598

A firm ended the last period with inventory of $4.0 million and a LIFO reserve of $175,000. During the year, it made purchases of $2.0
million and reported sales of $5.5 million with a gross margin of 0.32. At the end of the year, it reported a LIFO reserve of $75,000. What
is the value of the firm's cost of goods sold on a FIFO basis?

A) $3,640,000.
B) $3,740,000.
C) $3,840,000.

Question #51 of 120 Question ID: 1214599

Which of these intangible assets is most likely to be amortized?

A) Purchased patent that will expire in the current period.

B) Purchased franchise right with a useful life of two years.

C) Internally developed trademark with a useful life of 20 years.

Question #52 of 120 Question ID: 1214593

During 20X1, Tusa Company sold machinery with an original cost of $100,000, and recognized a $15,000 gain from the sale. At the time
of the sale, the accumulated depreciation of the machinery was $80,000. Ignoring taxes, the machinery sale will produce a:

A) $15,000 inflow from investing activities.

B) $20,000 inflow from operating activities.
C) $35,000 inflow from investing activities.
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Question #53 of 120 Question ID: 1214594

David Chance, CFA, is analyzing Grow Corporation. Chance gathers the following information:

Net cash provided by operating activities $3,500

Net cash used for fixed capital investments $727

Cash paid for interest $195

Income before tax $4,400

Income tax expense $1,540

Net income $2,860

Grow's free cash flow to the firm (FCFF) is closest to:

A) $2,260.
B) $2,640.
C) $2,900.

Question #54 of 120 Question ID: 1214597

For the last few years, firms in an expanding industry have found it more difficult to keep up with consumer demand despite steadily
increasing inventory levels. The Consumer Price Index (CPI) has been at a level of 1050, 1060, and 1087 in the last three years. Given
this situation, a firm in this industry that seeks to report higher net income would most likely prefer which inventory accounting method?

A) LIFO.
B) FIFO.
C) Average cost.

Question #55 of 120 Question ID: 1214603

Jo Evans, CFA, analyzes the financial statements of Shubert Company and writes, "Shubert's earnings, while sustainable, provide an
inadequate return to shareholders." Evans has expressed a concern with Shubert's:

A) quality of reported results only.

B) financial reporting quality only.
C) quality of reported results and financial reporting quality.

Question #56 of 120 Question ID: 1214601

Selected information on Reckner Company's income taxes appears in the following table:

20X1 20X2 20X3

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Taxes payable 250 500 500

Deferred tax assets 200 300 200

Deferred tax liabilities 200 300 400

Compared to 20X2, Reckner's 20X3 income tax expense:

A) increased.
B) decreased.
C) remained the same.

Question #57 of 120 Question ID: 1214600

A decrease in accumulated depreciation is most likely to result from:

A) selling or disposing of a long-lived asset.

B) increasing the salvage value of a long-lived asset.
C) decreasing the estimated useful life of a long-lived asset.

Question #58 of 120 Question ID: 1214591

Magnus Aerospace produces and sells aircraft and has approximately a 2-year operating cycle. Magnus's liabilities include commercial
paper due in 270 days, a bank note due in one year, and bonds that will mature in 18 months. Magnus should most appropriately
classify as current liabilities:

A) all of these liabilities.

B) only the commercial paper.

C) the commercial paper and the bank note.

Question #59 of 120 Question ID: 1214604

An analyst gathers the following selected financial information on Quip Corp.

Partial financials for 20X8 Quip Corp

Sales $350,000

Cost of goods sold 270,000

Net income 35,000

Current assets 165,000

Current liabilities 130,000

20X8 LIFO reserve 30,000

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20X7 LIFO reserve 20,000

To compare Quip and its competitors, an analyst makes the necessary adjustments to restate Quip's financial statements to reflect the
FIFO inventory accounting method. Quip's adjusted gross profit margin is closest to:

A) 20%.
B) 23%.
C) 26%.

Question #60 of 120 Question ID: 1214596

Hazel Edwards, CFA, is analyzing Collins Footwear, Inc. and obtains the following data for the company's major geographic segments:

Asia Europe North America

Sales (U.S. dollars) $200 million $300 million $500 million

Net profit margin 4.5% 3.0% 1.5%

Asset turnover 1.5× 2.5× 4.0×

Based on these data, Edwards should conclude that Collins's:

A) smallest segment by assets is Asia.

B) most profitable segment by return on assets is Europe.
C) most profitable segment by net income is North America.

Question #61 of 120 Question ID: 1214608

Questions 61 through 72 relate to Corporate Finance. (18 minutes)

Companies that can only raise a limited amount of funds to invest in projects must use:

A) capital rationing.
B) project sequencing.
C) capital preservation.

Question #62 of 120 Question ID: 1214605

Special resolutions that require a supermajority of shareholder votes may be addressed:

A) only at the annual general meeting.

B) only at an extraordinary general meeting.
C) at either the annual general meeting or an extraordinary general meeting.
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Question #63 of 120 Question ID: 1214613

Other things equal, a company's operating breakeven level of sales is most likely to increase when:

A) the tax rate is increased.

B) its scale of operations is increased.
C) fixed interest charges are increased.

Question #64 of 120 Question ID: 1214609

Inverness Corporation is considering investing in one of two mutually exclusive projects. The firm's cost of capital is 15%. Project One's
NPV profile crosses the vertical axis at $1.8 million and crosses the horizontal axis at 25%. Project Two's NPV profile crosses the
vertical axis at $1.2 million and crosses the horizontal axis at 33%. For the two projects, the crossover rate is 18%. Inverness should:

A) accept Project One.

B) accept Project Two.
C) reject both projects.

Question #65 of 120 Question ID: 1214607

Which of the following factors should an analyst most likely consider favorable for shareholders' interests?

A) Non-executive directors.
B) Anti-takeover provisions.
C) Dual-class share structures.

Question #66 of 120 Question ID: 1214611

The cost of preferred equity in a company's capital structure is based on the relationship between a preferred share's:

A) dividend and par value.

B) dividend and market price.
C) dividend yield and expected growth.

Question #67 of 120 Question ID: 1214612

To choose the weights for a firm's weighted average cost of capital (WACC), an analyst should most appropriately use the:
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A) firm’s current debt and equity weights based on market value.

B) firm’s stated target capital structure even though recent fund raising has diverged slightly
from the target weights.
C) average debt and equity weights based on market value of the firm’s competitors.

Question #68 of 120 Question ID: 1214615

Drags on liquidity are most likely to include:

A) inventory obsolescence.
B) paying vendors too soon.
C) suppliers requiring payment sooner.

Question #69 of 120 Question ID: 1214614

A company with which of the following leverage measures would exhibit the least sensitivity of earnings per share to a change in sales?

Degree of operating leverage Degree of financial leverage

A) 1.5 3.0

B) 2.0 2.5

C) 2.5 2.0

Question #70 of 120 Question ID: 1214616

Shawn Wright, CFA, is evaluating the short-term investment policy for Hegeman Industries. Wright should most likely conclude that
Hegeman's investment policy is:

A) inappropriate if it restricts the types of securities that can be held.

B) appropriate if it lists specific issuers from which Hegeman may purchase securities.
C) appropriate if it limits the proportion of the total portfolio that can be held in various types of
issues.

Question #71 of 120 Question ID: 1214606

A company's corporate governance procedures, with respect to stakeholder management, are best described as part of its:

A) legal infrastructure.
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B) contractual infrastructure.
C) organizational infrastructure.

Question #72 of 120 Question ID: 1214610

A company announces a new project that an analyst believes will require an investment of $5 per share this year and will increase after-
tax cash flow by $1 per share in each of the next eight years. Assuming this project is new information and does not have any signaling
effects, what should the analyst estimate as the impact of acceptance of the project on the value of the company's shares?

A) An increase of $3.
B) Either an increase or a decrease.
C) An increase of less than $3.

Question #73 of 120 Question ID: 1214623

Questions 73 through 86 relate to Equity Investments. (21 minutes)

The most likely reason that a company's book value of equity and the market value of its equity securities may be different is that:

A) market value of equity securities includes preferred stock, but the book value of equity does
not.
B) the issuance of new equity will increase the book value of equity, but will not affect the share
price.
C) the market value of equity securities reflects investor expectations about future performance,
but book value of equity does not.

Question #74 of 120 Question ID: 1214626

A firm attempts to gain market share from its competitors by improving its manufacturing efficiency so that it can increase output and
reduce the price of its product. This firm's competitive strategy is most accurately described as:

A) an offensive differentiation strategy.

B) an offensive cost leadership strategy.
C) a defensive cost leadership strategy.

Question #75 of 120 Question ID: 1214627

Yong Kim, CFA, buys a preferred stock that has a 6% dividend yield (defined as the ratio of the preferred dividend to the market price of
the preferred stock). One year later, Kim sells the stock when it is selling at a 5% dividend yield. The preferred stock pays a fixed annual
dividend, which Kim received right before selling. What rate of return did Kim realize on his investment?
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A) 14%.
B) 20%.
C) 26%.

Question #76 of 120 Question ID: 1214624

A U.S. investor purchases ADRs of a Japanese company, while a Japanese investor purchases the same value of the company's
common stock. Compared to the Japanese investor, the U.S. investor will most likely:

A) face the same risk.

B) realize different returns.
C) benefit from greater transparency.

Question #77 of 120 Question ID: 1214628

Larry Rile is evaluating the investment merits of Bing Corp., a successful motorcycle manufacturer. Rile is forecasting a dividend in year
1 of $1.50 per share, a dividend in year 2 of $3.00 per share, and a dividend in year 3 of $4.50 per share. After year 3, Rile expects
dividends to grow at the rate of 6% per year. Rile calculates a beta of 1.3 for Bing. Rile expects the S&P 500 index to return 8%. The
U.S. Treasury bill is yielding 2%. Using the multistage dividend discount model, Bing's intrinsic value is closest to:

A) $92 per share.

B) $102 per share.
C) $112 per share.

Question #78 of 120 Question ID: 1214618

A securities exchange is structured as a call market. On that exchange, a stock would trade at:

A) any time the market is open.

B) one negotiated price that clears the market.

C) prices set by auction or by dealer bid-ask quotes.

Question #79 of 120 Question ID: 1214629

Enterprise value is most accurately interpreted as the:

A) cost to take over a firm.

B) fair market value of a firm’s equity.
C) market value of a firm’s equity plus the market value of its debt.
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Question #80 of 120 Question ID: 1214625

James Martindale, CFA, manages a small mutual fund specializing in defensive stocks. For this fund, Martindale will buy stocks with:

A) high beta.
B) low systematic risk.
C) low price-to-earnings ratios.

Question #81 of 120 Question ID: 1214622

In an informationally efficient capital market, a portfolio manager who follows an active investment strategy is most likely to:

A) outperform a passive index strategy on average over time.

B) underperform a passive index strategy on average over time.

C) earn the same net return over time as a passive index strategy.

Question #82 of 120 Question ID: 1214619

Which of the following limit orders is least likely to be filled?

A) Inside-the-market limit sell order.

B) Behind-the-market limit buy order.
C) Aggressively priced limit buy order.

Question #83 of 120 Question ID: 1214620

Creating a bond market index is more difficult than constructing a stock market index due to:

A) lack of continuous trade data for bonds.

B) lower price volatility of bonds versus stocks.
C) a narrower universe of bonds versus stocks.

Question #84 of 120 Question ID: 1214621

A given percentage change in one of the 30 stocks in the Dow Jones Industrial Average (DJIA) will have the greatest impact on the DJIA
for which index stock?
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A) The one whose total equity has the highest market value.
B) The one whose stock trades at the highest dollar price per share.
C) The one having the greatest amount of equity in its capital structure.

Question #85 of 120 Question ID: 1214630

Jim Boo, CFA, is analyzing Justin Corp., a maker of home appliances. Boo's research provides the following facts:

Justin's stock price is $60 per share.

Expected growth rate of dividends is 5%.
Expected retention ratio is 60%.
Required rate of return is 10%.

Justin's expected price to earnings ratio (P0/E1) is closest to:

A) 8.0x.
B) 10.0x.
C) 12.0x.

Question #86 of 120 Question ID: 1214617

An investor purchased a stock for $60 a share using margin from his broker. If the initial margin requirement is 40%, and the
maintenance margin requirement is 20%, a margin call will initially be triggered below a share price of:

A) $30.

B) $45.
C) $48.

Question #87 of 120 Question ID: 1214632

Questions 87 through 99 relate to Fixed Income. (19.5 minutes)

Which of the following sources of short-term funding for banks is most likely to have the lowest interest cost?

A) Interbank funds.
B) Checking deposits.
C) Central bank funds.

Question #88 of 120 Question ID: 1214638

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The current price of a $1,000 par value, 6-year, 4.2% semiannual coupon bond is $958.97. The bond's price value of a basis point is
closest to:

A) $0.50.
B) $4.20.
C) $5.01.

Question #89 of 120 Question ID: 1214639

Which of the following bonds is most likely to have the greatest convexity at a yield to maturity of 3.5%?

A) 2-year, 3% coupon bond.

B) 5-year, 4% coupon bond.
C) 10-year, zero-coupon bond.

Question #90 of 120 Question ID: 1214643

Yield spreads are most likely to widen in a market environment that exhibits:

A) slowing economic growth.

B) high GDP growth rates.
C) lower-than-normal supply of new bond issuance.

Question #91 of 120 Question ID: 1214633

A 10-year, 5% bond is issued at a price to yield 5.2%. Three months after issuance, the yield on this bond has decreased by 100 basis
points. The price of this bond at issuance and three months later is:

A) above par at issuance, but below par three months later.

B) below par at issuance, but above par three months later.

C) below par at issuance, and below par three months later.

Question #92 of 120 Question ID: 1214635

Kathy Hurst, CFA, is valuing a 4-year zero coupon security and has acquired the following information:

1-year spot rate 6.0%

4-year spot rate 7.5%

1-year forward rate 1 year from now 7.3%

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1-year forward rate 3 years from now 8.9%

The 1-year forward rate 2 years from now is closest to:

A) 7.3%.
B) 7.8%.

C) 8.0%.

Question #93 of 120 Question ID: 1214640

Effective duration is the most appropriate measure of interest rate risk when:

A) a bond’s credit rating may change significantly.

B) the investor is seeking to minimize a duration gap.
C) the path of interest rate changes affects a bond’s cash flows.

Question #94 of 120 Question ID: 1214644

A bond indenture states that the source of funds for repayment will be tolls paid by drivers using a highway constructed with the bond
proceeds. This bond is most likely a:

A) secured bond.
B) revenue bond.
C) quasi-government bond.

Question #95 of 120 Question ID: 1214636

A collateralized mortgage obligation with agency RMBS as the collateral is least likely to be created to offer securities with less:

A) default risk than the underlying RMBS.

B) extension risk than the underlying RMBS.
C) prepayment risk than the underlying RMBS.

Question #96 of 120 Question ID: 1214642

Bond X carries a rating of BBB-/Baa3. Bond Y has a rating of B/B2. Both bonds mature in 10 years. Which bond's value would be most
affected by a ratings downgrade, and which bond has the higher default risk?

A) Bond X would be more affected by a ratings downgrade, but Bond Y has higher default risk.

B) Bond Y would be more affected by a ratings downgrade, but Bond X has higher default risk.
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C) Bond X has higher default risk, but both bonds would experience similar effects of a ratings
downgrade.

Question #97 of 120 Question ID: 1214631

The bid-ask spread for a bond most likely conveys information about:

A) its liquidity, but not its credit quality.

B) its credit quality, but not its liquidity.
C) both its liquidity and its credit quality.

Question #98 of 120 Question ID: 1214637

An investor buys an annual pay, 4% coupon bond for 102. The trade will settle immediately after the annual coupon payment and the
bond has five years left to maturity. The investor sells the bond two years later for 101.5. The investor's holding period return on the
bond includes:

A) a capital loss.
B) a capital gain.
C) neither a capital loss nor gain.

Question #99 of 120 Question ID: 1214634

Gerald Snow is a bond manager for Long Vision Investments. Snow is evaluating potential arbitrage opportunities. He has the following
list of bonds:

Bond X is a 1-year zero coupon bond selling at 950.

Bond Y is a 2-year zero coupon bond selling at 850.
Bond Z is a 2-year bond with an annual coupon of 8%.

All three bonds have a par value of $1,000. If no arbitrage opportunity exists, the price of Bond Z is closest to:

A) $975.
B) $995.
C) $1,015.

Question #100 of 120 Question ID: 1214649

Questions 100 through 106 relate to Derivatives. (10.5 minutes)

The value of a European put option at expiration is most likely to be increased by:
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A) a higher exercise price.

B) a lower risk-free interest rate.
C) higher volatility of the underlying asset price.

Question #101 of 120 Question ID: 1214645

A characteristic that distinguishes derivatives from ETFs is that derivatives:

A) transform the performance of their underlying assets.

B) are contingent claims on the performance of their underlying assets.
C) derive their performance from the performance of their underlying assets.

Question #102 of 120 Question ID: 1214647

For an underlying asset with no holding costs or benefits, the no-arbitrage forward price equals:

A) the spot price.

B) the future value of the spot price.
C) zero at initiation of a forward contract.

Question #103 of 120 Question ID: 1214650

Which of the following portfolios has the same future cash flows as a protective put?

A) Long call option, long risk-free bond.

B) Short call option, long risk-free bond.
C) Long call option, long risk-free bond, short the underlying asset.

Question #104 of 120 Question ID: 1214651

The right to exercise an option prior to expiration is most likely to have value for:

A) a deep in-the-money call option on an asset with no cash flows.

B) an at-the-money put option on an asset with positive cash flows.
C) an at-the-money call option on an asset with positive cash flows.

Question #105 of 120

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Question ID: 1214648

Which of the following is least likely a pure arbitrage strategy?

A) Selling a forward contract and buying the underlying asset.

B) Borrowing at 1-year LIBOR and buying a 5-year Treasury bond.
C) Borrowing at 30-day LIBOR, lending at 90-day LIBOR, and buying a 30-day FRA on 60-day
LIBOR.

Question #106 of 120 Question ID: 1214646

An investor buys an October 80 put option on a stock for a premium of $5. On the expiration date the stock price is 78 per share. The
investor's gain or loss on the option is:

A) a loss of $2.
B) a loss of $3.
C) a gain of $2.

Question #107 of 120 Question ID: 1214652

Questions 107 through 113 relate to Alternative Investments. (10.5 minutes)

For the valuation of real estate investment trusts (REITs), the asset-based approach estimates value by:

A) subtracting recurring capital expenditures from funds from operations.

B) adding depreciation, subtracting gains from property sales, and adding losses on property
sales.
C) subtracting total liabilities from the total value of the real estate assets and dividing by the
number of shares outstanding.

Question #108 of 120 Question ID: 1214654

On the financial statements of a hedge fund, asset values for positions the fund holds are most appropriately calculated using the bid
price for:

A) all positions.
B) short positions, and the ask price for long positions.
C) long positions, and the ask price for short positions.

Question #109 of 120 Question ID: 1214653

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The period of time during which a private equity fund will select investments and direct committed capital to them is best described as a:

A) notice period.
B) lockup period.
C) drawdown period.

Question #110 of 120 Question ID: 1214655

Arkex Funds is a hedge fund with a value of $100 million at the beginning of the year. Arkex Funds charges a 2.0% management fee
based on assets under management at the beginning of the year and a 20.0% incentive fee with a 5.0% hard hurdle rate. Incentive fees
are calculated net of management fees. The value of the fund at the end of the year before fees is $110 million. The net return to
investors is closest to:

A) 6.8%.
B) 7.4%.
C) 8.0%.

Question #111 of 120 Question ID: 1214656

A long-only commodity index investment is most likely to:

A) perform poorly in inflationary periods.

B) have a high correlation with equity returns.
C) be implemented by using derivatives.

Question #112 of 120 Question ID: 1214657

Measures of downside risk such as the Sortino ratio are most likely to be more appropriate than standard deviation for measuring risk of
a:

A) macro strategy fund.

B) real estate investment trust.
C) commodity exchange-traded fund.

Question #113 of 120 Question ID: 1214658

Which of the following is least likely an important element of risk management for alternative investment funds?

A) Setting leverage limits.

B) Obtaining independent valuations of fund positions.
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C) Designating a risk management officer who also works as part of the investment team.

Question #114 of 120 Question ID: 1214665

Questions 114 through 120 relate to Portfolio Management. (10.5 minutes)

The sensitivity of a derivative's value to the price of the underlying asset is measured by the derivative's:

A) beta.
B) delta.
C) gamma.

Question #115 of 120 Question ID: 1214661

The standard deviation of returns for a portfolio of risky assets is:

A) less than the standard deviation of the least risky asset.

B) greater than the standard deviation of the least risky asset.
C) less than or equal to the standard deviation of the most risky asset.

Question #116 of 120 Question ID: 1214659

An equally weighted portfolio of five securities has a standard deviation of returns of 10%. The average standard deviation of returns of
the five securities is 15%. If another security with a standard deviation of returns of 15% is added to the portfolio, and the weights are
adjusted to restore equal weighting, the portfolio's diversification ratio is most likely to:

A) increase.
B) decrease.
C) remain unchanged.

Question #117 of 120 Question ID: 1214663

Which of the following statements about the security market line (SML) is least accurate?

A) The independent variable in the SML equation is the standard deviation of the market
portfolio.
B) The SML measures risk using the standardized covariance of the stock with the market.
C) Securities plotting above the SML are undervalued.
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Question #118 of 120 Question ID: 1214664

The problem of investment managers taking offsetting active positions is most likely addressed by employing:

A) risk budgeting.
B) tactical asset allocation.
C) a core-satellite approach.

Question #119 of 120 Question ID: 1214662

Bearing unsystematic risk should provide no additional expected return:

A) under any circumstances.

B) if diversification is cost-free.
C) in a strong-form efficient market.

Question #120 of 120 Question ID: 1214660

An investor buys a non-dividend paying stock for $100 at the beginning of the year with 50% initial margin. At the end of the year, the
stock price is $95. Deflation of 2% occurred during the year. Which of the following return measures for this investment will be greatest?

A) Real return.
B) Nominal return.
C) Leveraged return.