CFA Level I

Question #1 of 18 Question ID: 1104308

Karen Jones, CFA, is an outside director for Valley Manufacturing. At a directors' meeting, Jones finds out that Valley has made
several contributions to foreign politicians that she suspects were illegal. Jones checks with her firm's legal counsel and
determines that the contributions were indeed illegal. At the next board meeting, Jones urges the board to disclose the
contributions. The board, however, votes not to make a disclosure. Jones's most appropriate action would be to:

A) protest the board’s actions in writing to the executive officer of Valley.

B) resign from the board and seek legal counsel as to her legal disclosure requirements.
C) inform her supervisor of her discovery and cease attending meetings until the matter is
resolved.

Question #2 of 18 Question ID: 1104310

Over the past two days, Lorraine Quigley, CFA, who is the manager of a hedge fund, has been purchasing large quantities of
Craeger Industrial Products' common stock while at the same time shorting put options on the same stock. Quigley did not notify
her clients of the trades, although they are aware of the fund's general strategy to generate returns. Which of the following
statements is most likely correct? Quigley:

A) did not violate the Code and Standards.

B) violated the Code and Standards by manipulating the prices of publicly traded
securities.
C) violated the Code and Standards by failing to disclose the transactions to clients before
they occurred.

Question #3 of 18 Question ID: 1104314

Melvin Byrne, CFA, manages a portfolio for James Martin, a wealthy client. Martin's portfolio is well diversified with a slight tilt
toward capital appreciation. Martin requires very little income from the portfolio. Recently, Martin's brother, Cliff, has become a
client of Byrne. Byrne proceeds to invest Cliff's portfolio in a similar manner to James's portfolio based on the fact that both
brothers have a similar lifestyle and are only two years apart in age. Which of the following statements is most likely correct?
Byrne:

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 A) violated the Code and Standards by knowingly creating a conflict of interest between
James’s and Cliff’s portfolios.
B) violated the Code and Standards by failing to determine Cliff’s objectives and
constraints prior to investing his portfolio.
C) did not violate the Code and Standards.

Question #4 of 18 Question ID: 1104316

Robert Blair, CFA, is a director of research and has had an ongoing battle with his firm's management about the adequacy of its
compliance system. Blair believes the firm's compliance procedures are inadequate in that they are not being monitored or
carefully followed. Blair should most appropriately:

A) resign from the firm unless the compliance system is strengthened and followed.
B) send his superior a memo outlining the problem.

C) decline in writing to continue to accept supervisory responsibility until reasonable

compliance procedures are adopted.

Question #5 of 18 Question ID: 1104315

Beth Anderson, CFA, is a portfolio manager for several wealthy clients, including Reuben Carlyle. Anderson manages Carlyle's
personal portfolio of stock and bond investments. Carlyle recently told Anderson that he is under investigation for tax evasion
related to his business, Carlyle Concrete. After learning about the investigation, Anderson informs a friend at a local investment
bank so that the bank may withdraw their proposal to take Carlyle Concrete public. Anderson has most likely:

A) violated the Code and Standards by failing to maintain the confidentiality of her client’s
information.
B) violated the Code and Standards by failing to detect and report the tax evasion to the
proper authorities.

C) not violated the Code and Standards since the information she conveyed pertained to
illegal activities on the part of her client.

Question #6 of 18 Question ID: 1104318

A research report states: "Based on the fact that the South American utilities sector has seen rapid growth in new service orders,
we expect that most companies in the sector will be able to convert the revenue increases into significant profits. We also
believe the trend will continue for the next three to five years." The report goes on to describe the major risks of investing in this
market. The author of this report:

A) has not violated the Code and Standards.

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 B) violated the Code and Standards by failing to properly distinguish factual information
from opinions.

C) violated the Code and Standards by failing to properly identify details related to the
operations of South American utilities.

Question #7 of 18 Question ID: 1104321

Frist Investments, Inc., has just hired Michael Pulin to manage institutional portfolios, most of which are pension related. Pulin
has just taken the Level III CFA exam and is awaiting his results. Pulin has more than 15 years of investment management
experience with individual clients but has never managed an institutional portfolio. Pulin joined the CFA Institute as an affiliate
member two years ago and is in good standing with the organization. Which of the following statements would be most
appropriate for Frist to use in advertising Pulin as a new member of the firm? Pulin:

A) has many years of investment experience, which, along with his participation in the CFA
program, will allow him to deliver superior investment performance relative to other
managers.
B) is a CFA Level III and passed the first two exams on the first attempt. He is an affiliate
member of the CFA Institute. We expect him to become a regular member if he passes
the Level III examination.

C) is a Level III CFA candidate and has many years of excellent performance in the
investment management industry. Pulin is an affiliate member of the CFA Institute and
will be eligible to become a CFA charterholder and regular member if he passes the
Level III CFA Exam.

Question #8 of 18 Question ID: 1104311

Zanuatu, an island nation, does not have any regulations precluding the use of nonpublic information. Alfredo Romero has a
friend and fellow CFA charterholder there, Donna Gordon, with whom he has shared nonpublic information regarding firms
outside his industry. The information concerns several firms' internal earnings and cash flow projections. Gordon may:

A) trade on the information under the laws of Zanuatu, which govern her behavior.

B) not trade on the information under CFA Institute Standards, which govern her behavior.
C) trade on the information under CFA Institute Standards, since the firms concerned are
outside Romero’s industry.

Question #9 of 18 Question ID: 1104322

Samantha Donovan, CFA, is an exam proctor for the Level II CFA exam. The day before the exam is to be administered,
Donovan faxes a copy of one of the questions to two friends, James Smythe and Lynn Yeats, who are Level II candidates in the
CFA program. Donovan, Smythe, and Yeats had planned the distribution of an exam question months in advance. Smythe used
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the fax to prepare for the exam. Yeats, however, had second thoughts and threw the fax away without looking at its contents.
Which of the following statements is most likely correct?

A) Smythe violated the Code and Standards, but Yeats did not.
B) Donovan violated the Code and Standards, but Smythe did not.
C) Donovan and Yeats both violated the Code and Standards.

Question #10 of 18 Question ID: 1104317

Sally Albright, CFA, works full time for Frank & Company, an investment management firm, as a fixed-income security analyst.
Albright has been asked by a business contact at KDG Enterprises to accept some analytical work from KDG on a consulting
basis. The work would entail investigating potential distressed debt securities in the small-cap market. Albright should most
appropriately:

A) accept the work as long as she obtains consent to all the terms of the engagement from
Frank & Company.
B) not accept the work as it violates the Code and Standards by creating a conflict of
interest.
C) accept the work as long as she obtains written consent from KDG and does it on her
own time.

Question #11 of 18 Question ID: 1104309

Josef Karloff, CFA, acts as liaison between Pinnacle Financial (an investment management firm) and Summit Inc. (an investment
banking boutique specializing in penny stocks). When Summit underwrites an IPO, Karloff routinely has Pinnacle issue vague
statements implying that the firm has cash flows, financial resources, and growth prospects that are better than is the case in
reality. This action is most likely a violation of the section of the Standards concerning:

A) fair dealing.
B) nonpublic information.

C) misconduct.

Question #12 of 18 Question ID: 1104313

Steve Matthews, CFA, is a principal at Carlson Brothers, a leading regional investment bank specializing in initial public offerings
of small to mid-sized biotech firms. Just before many of the IPOs are offered to the general public, Matthews arranges for 10% of
the shares to be distributed to management of the firm going public. This action is a violation of the Standard concerning:

A) additional compensation.
B) disclosure of conflicts of interest. 4
 C) fair dealing.

Question #13 of 18 Question ID: 1104312

Will Hunter, CFA, is a portfolio manager at NV Asset Managers. An investment banker asks Hunter to purchase shares in a new
IPO to support the price long enough for insiders to liquidate their holdings. Hunter realizes that the price of the shares will
almost certainly fall dramatically after his buying support ceases. NV management strongly suggests that Hunter honor the
investment banker's request since NV has had a longstanding relationship with the investment bank. If Hunter agrees to make
the purchases, he will:

A) not violate the Code and Standards.

B) violate the Standard concerning market manipulation.

C) violate the Standard concerning priority of transactions.

Question #14 of 18 Question ID: 1104319

Neiman Investment Co. receives brokerage business from Pick Asset Management in exchange for referring prospective clients
to Pick. Pick advises clients—in writing, before the relationship is established—of the nature of its arrangement with Neiman.
With regard to this practice, Pick has:

A) complied with the Code and Standards.

B) violated the Code and Standards by failing to preserve the confidentiality of the
agreement with Neiman.
C) violated the Code and Standards by participating in an agreement that creates a conflict
of interest.

Question #15 of 18 Question ID: 1104320

Ralph Salley, a Level I candidate in the CFA Program, is explaining Standard VI(B) Priority of Transactions to his supervisor.
Salley states, "The Standard recommends, but does not require, that members and candidates should not participate in initial
public offerings. The Standard also recommends that trades for accounts of family members be made after those for other
clients, but before those for the account of the members and candidates responsible for executing the transactions." Salley's
explanation of the Standard is:

A) correct.

B) incorrect, because the Standard does not recommend that trades for family members
be made after those for other clients.
C) incorrect, because the Standard requires that members and candidates not participate
in initial public offerings.
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Question #16 of 18 Question ID: 1104325

Which of the following policies is required to comply with GIPS?

A) Compliance with GIPS must be verified by an independent third party.

B) Restructuring of the firm’s organization cannot be used as a basis to change the
historical performance results of a composite.
C) The definition of the firm must include the firm’s offices in all countries and regions.

Question #17 of 18 Question ID: 1104323

Mason Smith is trying to decide which of the following composite definitions, submitted by his junior analysts, would be
considered an acceptable composite according to GIPS. An acceptable composite can include all:

A) accounts that are managed directly from the firm’s Hong Kong office.
B) actively managed portfolios, but exclude passively managed portfolios.
C) portfolios that are managed to provide a return approximately equal to that of the S&P
500 Index.

Question #18 of 18 Question ID: 1104324

An investment management firm, Investco, Inc., was recently audited by the United States Securities and Exchange Commission
(SEC). Investco included the following statement in its performance presentation report: "This report has been verified as GIPS
compliant by Investco's Compliance Department and the United States Securities and Exchange Commission." Does this
constitute acceptable verification under GIPS?

A) No, because only one party may perform GIPS verification.

B) No, because neither party involved in the audit constitutes an acceptable GIPS
verification.
C) Yes, because an audit was performed implicitly by the SEC and explicitly by the firm’s
audit team.

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 CFA Level I

Question #1 of 12 Question ID: 1210896

Allan Jabber invested $400 at the beginning of each of the last 12 months in the shares of a mutual fund that paid no dividends.
Which method will he correctly choose to calculate his average price per share from the monthly share prices?

A) Arithmetic mean.

B) Harmonic mean.
C) Geometric mean.

Question #2 of 12 Question ID: 1210898

Colonia has only two political parties, the Wigs and the Wags. If the Wags are elected, there is a 32% probability of a tax
increase over the next four years. If the Wigs are elected, there is a 60% probability of a tax increase. Based on the current polls,
there is a 20% probability that the Wags will be elected. The sum of the (unconditional) probability of a tax increase and the joint
probability that the Wigs will be elected and there will be no tax increase are closest to:

A) 55%.
B) 70%.
C) 85%.

Question #3 of 12 Question ID: 1210899

An analyst who wants to display the relationship between two variables graphically is most likelyto use:

A) a histogram.
B) a scatterplot.

C) a frequency polygon.

Question #4 of 12 Question ID: 1106390

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Ralph will retire 15 years from today and has saved $121,000 in his investment account for retirement. He believes he will need
$37,000 at the beginning of each year for 25 years of retirement, with the first withdrawal on the day he retires. Ralph assumes
that his investment account will return 8%. The amount he needs to deposit at the beginning of this year and each of the
following 14 years (15 deposits in all) is closest to:

A) $1,350.
B) $1,450.
C) $1,550.

Question #5 of 12 Question ID: 1210897

The current price of Bosto shares is 50. Over the coming year, there is a 40% probability that share returns will be 10%, a 40%
probability that share returns will be 12.5%, and a 20% probability that share returns will be 30%. Bosto's expected return and
standard deviation of returns for the coming year are closest to:

Expected return Standard deviation

A) 15.0% 7.58%

B) 17.5% 5.75%

C) 17.5% 7.58%

Question #6 of 12 Question ID: 1106391

Nikki Ali and Donald Ankard borrowed $15,000 to finance their wedding and reception. The fully amortizing loan at 11% requires
equal payments at the end of each of the next seven years. The principal portion of the first payment is closest to:

A) $1,500.
B) $1,530.

C) $1,560.

Question #7 of 12 Question ID: 1210901

Which of the following statements about probability distributions is least accurate?

A) Continuous uniform distributions have cumulative distribution functions that are straight
lines from zero to one.

B) The probability that a continuously distributed random variable will take on a specific
value is always zero.
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 C) A normally distributed random variable divided by its standard deviation will follow a
standard normal probability distribution.

Question #8 of 12 Question ID: 1210904

An analyst wants to construct a hypothesis test to determine whether the mean weekly return on a stock is positive. The null
hypothesis for this test should be that the mean return is:

A) greater than zero.

B) less than or equal to zero.

C) greater than or equal to zero.

Question #9 of 12 Question ID: 1210900

X, Y, and Z are independently distributed random variables. The probability of X is 30%, the probability of Y is 40%, and the
probability of Z is 20%. Which of the following is closest to the probability that either X or Y will occur?

A) 70%.

B) 58%.
C) 12%.

Question #10 of 12 Question ID: 1210905

An analyst should use a t-test with n – 1 degrees of freedom to test a null hypothesis that two variables have:

A) equal means.
B) equal variances.
C) no linear relationship.

Question #11 of 12 Question ID: 1210903

The percentage changes in annual earnings for a company are approximately normally distributed with a mean of 5% and a
standard deviation of 12%. The probability that the average change in earnings over the next five years will be greater than
15.5% is closest to:

A) 2.5%.

B) 5.0%.
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 C) 10.0%.

Question #12 of 12 Question ID: 1210902

Which of the following is least likely correct concerning a random variable that is lognormally distributed?

A) It has a symmetric distribution.

B) The natural logarithms of the random variable are normally distributed.

C) It is a univariate distribution.

10
 CFA Level I

Question #1 of 12 Question ID: 1210908

An analyst is evaluating the degree of competition in an industry and compiles the following information:

Few significant barriers to entry or exit exist.

Firms in the industry produce slightly differentiated products.
Each firm faces a demand curve that is largely unaffected by the actions of other individual firms in the industry.

The analyst should characterize the competitive structure of this industry as:

A) oligopoly.

B) monopoly.

C) monopolistic competition.

Question #2 of 12 Question ID: 1210907

Which of the following statements about the behavior of firms in a perfectly competitive market is least accurate?

A) A firm experiencing economic losses in the short run will continue to operate if its
revenues are greater than its variable costs.

B) A firm that is producing less than the quantity for which marginal cost equals the market
price would lose money by increasing production.

C) If firms are earning economic profits in the short run, new firms will enter the market and
reduce economic profits to zero in the long run.

Question #3 of 12 Question ID: 1210914

Compared to a customs union or a common market, the primary advantage of an economic union is that:

A) its members adopt a common currency.

B) its members have a common economic policy.

C) it removes barriers to imports and exports among its members.

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Question #4 of 12 Question ID: 1210915

A country's balance of payments accounts show the following:

A net inflow of capital transfers.

Greater sales than purchases of non-financial assets.
Greater foreign-owned assets in the country than government-owned assets abroad.

The country is most accurately described as having:

A) a capital account deficit.

B) a current account deficit.
C) a financial account deficit.

Question #5 of 12 Question ID: 1210906

Other things equal, an increase of 2.0% in the price of Product X results in a 1.4% increase in the quantity demanded of Product
Y and a 0.7% decrease in the quantity demanded of Product Z. Which statement about products X, Y and Z is least accurate?

A) Products X and Y are substitutes.

B) Products X and Z are complements.

C) Products Y and Z are complements.

Question #6 of 12 Question ID: 1210916

The EUR/USD spot exchange rate is 0.70145, and one-year interest rates are 3% in EUR and 2% in USD. The forward
USD/EUR exchange rate is closest to:

A) 1.1426.
B) 1.4118.

C) 1.4396.

Question #7 of 12 Question ID: 1210917

Depreciation of a country's currency is most likely to narrow its trade deficit when:

A) its imports are greater in value than its exports.

B) price elasticity of import demand is greater than one.

C) investment increases relative to private and government savings.

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Question #8 of 12 Question ID: 1210911

According to real business cycle theory, business cycles result from:

A) rational responses to external shocks.

B) inappropriate changes in monetary policy.

C) increases and decreases in business confidence.

Question #9 of 12 Question ID: 1210913

A decrease in the target U.S. federal funds rate is least likely to result in:

A) a proportionate decrease in long-term interest rates.

B) an increase in consumer spending on durable goods.

C) depreciation of the U.S. dollar on the foreign exchange market.

Question #10 of 12 Question ID: 1210910

For an economy that is initially at full-employment real GDP, an increase in aggregate demand will most likely have what effects
on the price level and real GDP in the short run?

A) Both will increase in the short run.

B) Neither will increase in the short run.

C) Only one will increase in the short run.

Question #11 of 12 Question ID: 1210909

Potential real GDP is least likely to increase as a result of:

A) an improvement in technology.
B) an increase in the money wage rate.
C) an increase in the labor force participation ratio.

Question #12 of 12 Question ID: 1210912

When the economy is operating at the natural rate of unemployment,

13 it is most likely that:
A) inflation is accelerating.
B) frictional unemployment is absent.
C) structural unemployment is present.

14
 CFA Level I

Question #1 of 18 Question ID: 1210918

The fundamental qualitative characteristics of financial statements as described by the IASB conceptual framework least likely
include:

A) relevance.

B) reliability.
C) faithful representation.

Question #2 of 18 Question ID: 1210922

A decrease in a firm's inventory turnover ratio is most likely to result from:

A) a write-down of inventory.

B) goods in inventory becoming obsolete.

C) decreasing purchases in a period of stable sales.

Question #3 of 18 Question ID: 1210920

Two firms are identical except that the first pays higher interest charges and lower dividends, while the second pays higher
dividends and lower interest charges. Both prepare their financial statements under U.S. GAAP. Compared to the first, the
second will have cash flow from financing (CFF) and earnings per share (EPS) that are:

CFF EPS

A) The same Higher

B) Lower Higher

C) Lower The same

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Question #4 of 18 Question ID: 1210924

The following information is summarized from Famous, Inc.'s financial statements for the year, which ended December 31, 20X0:

Sales were $800,000.

Net profit margin was 20%.
Sales to assets was 50%.
Equity multiplier was 1.6.
Interest expense was $30,000.
Dividends declared were $32,000.

Famous, Inc.'s sustainable growth rate based on results from this period is closest to:

A) 3.2%.
B) 8.0%.
C) 12.8%.

Question #5 of 18 Question ID: 1210919

On January 1, Orange Computers issued employee stock options for 400,000 shares. Options on 200,000 shares have an
exercise price of $18, and options on the other 200,000 shares have an exercise price of $22. The year-end stock price was $24,
and the average stock price over the year was $20. The change in the number of shares used to calculate diluted earnings per
share for the year due to these options is closest to:

A) 20,000 shares.

B) 67,000 shares.

C) 100,000 shares.

Question #6 of 18 Question ID: 1210925

A snowmobile manufacturer that uses LIFO begins the year with an inventory of 3,000 snowmobiles, at a carrying cost of $4,000
each. In January, the company sells 2,000 snowmobiles at a price of $10,000 each. In July, the company adds 4,000
snowmobiles to inventory at a cost of $5,000 each. Compared to using a perpetual inventory system, using a periodic system for
the firm's annual financial statements would:

A) increase COGS by $2,000,000.

B) leave ending inventory unchanged.

C) decrease gross profit by $4,000,000.

Question #7 of 18 Question ID: 1210933

16
Which of the following is least likely to result in low-quality financial statements?

A) Unsustainable cash flows.

B) Activities that manage earnings.

C) Conservative accounting choices.

Question #8 of 18 Question ID: 1210927

Train Company paid $8,000,000 to acquire a franchise at the beginning of 20X5 that was expensed in 20X5. If Train had elected
to capitalize the franchise as an intangible asset and amortize the cost of the franchise over eight years, what effect would this
decision have on Train's 20X5 cash flow from operations (CFO) and 20X6 debt-to-assets ratio?

A) Both would be higher with capitalization.

B) Both would be lower with capitalization.

C) One would be higher and one would be lower with capitalization.

Question #9 of 18 Question ID: 1210931

Graphics, Inc. has a deferred tax asset of $4,000,000 on its books. As of December 31, it is probable that $2,000,000 of the
deferred tax asset's value will never be realized because of the uncertainty about future income. Under U.S. GAAP, Graphics,
Inc. should:

A) reduce the deferred tax asset account by $2,000,000.

B) establish a valuation allowance of $2,000,000.

C) establish an offsetting deferred tax liability of $2,000,000.

Question #10 of 18 Question ID: 1210928

Long-lived assets cease to be depreciated when the firm's management decides to dispose of the assets by:

A) sale.
B) abandonment.

C) exchange for another asset.

Question #11 of 18 Question ID: 1210930

An asset's tax base is most accurately described as the:

17
 A) tax-deductible expense that appears in the tax return in a given period.
B) amount of the asset that will not be expensed through the tax return in the future as the
economic benefits of the asset are realized.
C) amount of the asset to be expensed through the tax return in the future as the
economic benefits of the asset are realized.

Question #12 of 18 Question ID: 1210926

In the notes to its financial statements, Gilbert Company discloses a €400,000 reversal of an earlier write-down of inventory
values, which increases this inventory's carrying value to €2,000,000. It is most likely that:

A) the reasons for this reversal are also disclosed.

B) a gain of €400,000 appears on the income statement.
C) the net realizable value of this inventory is €2,000,000.

Question #13 of 18 Question ID: 1210934

If a firm's management wishes to use its discretion to increase operating cash flows, it is most likely to:

A) capitalize an expense.

B) decrease the allowance for uncollectible accounts.

C) change delivery terms from FOB destination to FOB shipping point.

Question #14 of 18 Question ID: 1210929

A firm that purchases a building that it intends to rent out for income would report this asset as investment property under:

A) U.S. GAAP only.

B) IFRS only.
C) both U.S. GAAP and IFRS.

Question #15 of 18 Question ID: 1210932

When a company redeems bonds before they mature, the gain or loss on debt extinguishment is calculated as the bonds'
carrying amount minus the:

A) face or par value of the bonds. 18

 B) amount required to redeem the bonds.
C) amortized historical cost of the bonds.

Question #16 of 18 Question ID: 1210923

Which of the following terms from the extended DuPont equation would an analyst least likely be able to obtain, given only a
company's common-size income statement and common-size balance sheet? The company's:

A) EBIT margin.
B) asset turnover.
C) financial leverage.

Question #17 of 18 Question ID: 1210935

An analyst is comparing two firms, one that reports under IFRS and one that reports under U.S. GAAP. An analyst is least likely
to do which of the following to facilitate a comparison of the companies?

A) Add the LIFO reserve to inventory for a United States-based firm that uses LIFO.

B) Add the present values of each firm’s future minimum operating lease payments to both
assets and liabilities.
C) Adjust the income statement of one of the firms if both have significant unrealized gains
or losses from changes in the fair values of trading securities.

Question #18 of 18 Question ID: 1210921

An analyst wants to compare the cash flows of two United States companies, one that reports cash flow using the direct method
and one that reports it using the indirect method. The analyst is most likely to:

A) convert the indirect statement to the direct method to compare the firms’ cash
expenditures.
B) adjust the reported CFO of the firm that reports under the direct method for depreciation
and amortization expense.
C) increase CFI for any dividends reported as investing cash flows by the firm reporting
cash flow by the direct method.

19
 CFA Level I

Question #1 of 12 Question ID: 1210944

An analyst calculates the following leverage ratios for Burkhardt Company and Dutchin Company:

Degree of Operating Leverage Degree of Financial Leverage

Burkhardt 1.6 3.0

Dutchin 1.2 4.0

If both companies' sales increase by 5%, what are the most likely effects on the companies' earnings before interest and taxes
(EBIT) and earnings per share (EPS)?

A) Both companies’ EBIT will increase by the same percentage.

B) Dutchin’s EPS will increase by a larger percentage than Burkhardt’s EPS.

C) Burkhardt’s EBIT will increase by a larger percentage than Dutchin’s EBIT.

Question #2 of 12 Question ID: 1210939

Sutter Corp. is considering two mutually exclusive projects with the following after-tax cash flows:

TIME 0 1 2 3 4 5 6

Project 1 –10,000 2,000 2,000 2,000 4,000 4,000 4,000

Project 2 –12,000 2,000 2,000 2,000 5,000 5,000 5,000

Given that Sutter's cost of capital is 7.5%, the IRR of the project that Sutter should select is closest to:

A) 13%.
B) 15%.

C) 17%.

Question #3 of 12 Question ID: 1210945

Which of the following changes in a firm's working capital management is most likely to result in a shorter operating cycle?
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 A) Reducing stock-outs by carrying greater quantities of inventory.
B) Stretching its payables by paying on the last permitted date.
C) Changing its credit terms for customers from 2/10, net 60 to 2/10, net 30.

Question #4 of 12 Question ID: 1210942

A company's operations analyst is evaluating a plant expansion project that is likely to be financed in part by issuing new
common equity. Flotation costs are expected to be 4% of the amount of new equity capital raised. The most appropriate way for
the analyst to treat the flotation costs is to:

A) ignore them, because flotation costs for common equity are likely to be nonmaterial.

B) estimate the cost of equity capital based on a share price 4% less than the current
price.

C) determine the flotation cost attributable to this project and treat it as part of the project’s
initial cash outflow.

Question #5 of 12 Question ID: 1210936

Executive directors are least likely to be included in:

A) a supervisory board.

B) a one-tier board.

C) a management board.

Question #6 of 12 Question ID: 1210937

The manufacturer of Pow Detergent has developed New Improved Pow with Dirteaters and is considering adding it to its product
line. New Improved Pow would sell at a premium price compared to Pow. In order to manufacture New Improved Pow, the firm
will need to build a new facility and purchase new equipment. Which of the following is least likely included when calculating the
appropriate cash flows for analysis of whether to add New Improved Pow to its product line?

A) Expected depreciation on the new facility and equipment for tax purposes.
B) Costs of a marketing survey performed last month to decide whether to introduce New
Improved Pow.

C) Reduced sales of Pow that result from the introduction of New Improved Pow.

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Question #7 of 12 Question ID: 1210946

The use of secondary sources of liquidity would most likely be considered:

A) a normal part of daily business for a company.

B) a signal that a company’s financial position is deteriorating.

C) a lower-cost source of short-term financing compared to primary sources of liquidity.

Question #8 of 12 Question ID: 1210943

Balfour Corp. is in the food distribution business and has a beta of 1.1, a marginal tax rate of 34%, and a debt-to-assets ratio of
40%. Balfour management is evaluating an entry into the fast-casual restaurant business. They have identified a publicly traded
company in the fast-casual restaurant industry that has an equity beta of 1.3, a marginal tax rate of 28%, and a debt-to-equity
ratio of 40%. The appropriate beta for Balfour to use in calculating the cost of equity capital for the analysis of the potential entry
into the restaurant business is closest to:

A) 1.15.
B) 1.30.

C) 1.45.

Question #9 of 12 Question ID: 1210938

With regard to the internal rate of return (IRR), which of the following statements is most accurate?

A) The IRR is the discount rate that maximizes a project’s net present value.

B) A proper decision rule is to accept the project if IRR is less than the required rate of
return.

C) IRR is the discount rate at which the present value of expected future after-tax cash
flows is equal to the investment outlay.

Question #10 of 12 Question ID: 1210947

In early 20X8, a company changed its customer credit terms from 2/10, net 30 to 2/10, net 40. Comparisons of accounts
receivable aging schedules at the end of 20X7 and 20X8 follow.

20X7 20X8
Number of Days
$ millions $ millions

0–30 380 350

31–60 65 140 22
 61–90 41 35

Over 90 54 55

Total accounts receivable 540 580

The trends in the company's receivables indicate:

A) improved collections on credit accounts.

B) slower payments from credit customers.

C) a higher receivables turnover ratio.

Question #11 of 12 Question ID: 1210941

William Mason, CFA, is a project manager for the semiconductor division of Mammoth Industries, a conglomerate. The
semiconductor division's projected cash flows are less certain than Mammoth's overall cash flows. When determining the net
present values of projects within the semiconductor division, Mason should use:

A) Mammoth Industries’ marginal cost of capital.

B) a lower marginal cost of capital than Mammoth Industries.

C) a higher marginal cost of capital than Mammoth Industries.

Question #12 of 12 Question ID: 1210940

Isaac Segovia, CFA, is using the net present value (NPV) and internal rate of return (IRR) methods to analyze a project for his
firm. After its initial cash outflow, the project will generate several years of cash inflows, but will require a net cash outflow in the
final year. The problem Segovia is most likely to encounter when using the NPV or IRR methods for this analysis is:

A) multiple IRRs.
B) negative NPV.
C) conflicting NPV and IRR project rankings.

23
 CFA Level I

Question #1 of 14 Question ID: 1210957

An investor purchased 550 shares of Akley common stock for $38,500 in a margin account and posted initial margin of 50%. The
maintenance margin requirement is 35%. The price of Akley, below which the investor would get a margin call, is closest to:

A) $45.00.

B) $54.00.
C) $59.50.

Question #2 of 14 Question ID: 1210958

Adams owns 100 shares of Brikley stock, which is trading at $86 per share, and Brown is short 200 shares of Brikley. Adams
wants to buy 100 more shares if the price rises to $90, and Brown wants to cover his short position and take profits if the price
falls to $75. The orders Adams and Brown should enter to accomplish their stated objectives are:

Adams Brown

A) Limit buy @ 90 Limit buy @ 75

B) Limit buy @ 90 Stop buy @ 75

C) Stop buy @ 90 Limit buy @ 75

Question #3 of 14 Question ID: 1210965

Which of the factors that determine the intensity of industry competition is most likely to be affected by the presence of significant
economies of scale?

A) Threat of entry.
B) Threat of substitutes.

C) Power of suppliers.

24
Question #4 of 14 Question ID: 1210968

Price-to-book value ratios are most appropriate for measuring the relative value of:

A) a bank.
B) a manufacturing company.
C) a mature technology company.

Question #5 of 14 Question ID: 1210959

An index of three non-dividend paying stocks is weighted by their market values. One of the index stocks splits 2-for-1 during the
year, but no shares are sold. The total return of this index for the year is:

A) less than the price return of the index.

B) equal to the price return of the index.

C) greater than the price return of the index.

Question #6 of 14 Question ID: 1210955

Financial intermediaries that buy securities from and sell securities to investors are best described as:

A) dealers.

B) brokers.
C) investment bankers.

Question #7 of 14 Question ID: 1210956

Among the types of assets that trade in organized markets, asset-backed securities are best characterized as:

A) real assets.

B) equity securities.
C) pooled investment vehicles.

Question #8 of 14 Question ID: 1210960

Which of the following market indexes is likely to be rebalanced most frequently? An index that is:
25
 A) price weighted.
B) value weighted.

C) equal weighted.

Question #9 of 14 Question ID: 1210966

Rogers Partners values stocks using a dividend discount model and the CAPM. Holding all other factors constant, which of the
following is least likely to increase the estimated value of a stock?

A) An increase in the next period’s expected dividend.

B) A decrease in the stock’s systematic risk.

C) A decrease in the expected growth rate of dividends.

Question #10 of 14 Question ID: 1210967

Brandy Clark, CFA, has forecast that Aceler, Inc., will pay its first dividend two years from now in the amount of $1.25. For the
following year, she forecasts a dividend of $2.00 and expects dividends to increase at an average rate of 7% for the foreseeable
future after that. If the risk-free rate is 4.5%, the expected market risk premium is 7.5%, and Aceler's beta is 0.9, Clark would
estimate the current value of Aceler shares as being closest to:

A) $37.
B) $39.

C) $47.

Question #11 of 14 Question ID: 1210963

The industry that is classified the more cyclical sector under a commercial industry classification scheme is:

A) personal care products.

B) food.
C) apparel.

Question #12 of 14 Question ID: 1210961

Compared to a passive investment strategy, active management, on average:

A) cannot outperform if markets are weak-form efficient. 26

 B) can outperform if markets are weak-form efficient but not semistrong-form efficient.
C) can outperform if markets are semistrong-form efficient but not strong-form efficient.

Question #13 of 14 Question ID: 1210964

Malley, Inc., is a manufacturer of sports apparel. Pruett, Inc., produces cardboard boxes for packaging. In a typical industry
classification system from a commercial index provider, in which sectors are these firms most likely to be classified?

Malley, Inc. Pruett, Inc.

A) Consumer staples Basic materials and processing

B) Consumer discretionary Basic materials and processing

C) Consumer staples Industrial and producer durables

Question #14 of 14 Question ID: 1210962

Assuming the value effect persists over time, which of the following strategies would be most likely to earn positive abnormal
returns? Purchase stocks with:

A) low dividend yields.

B) high market-to-book ratios.

C) low price-to-earnings ratios.

27
 CFA Level I

Question #1 of 14 Question ID: 1210977

An estimate of the increase in an option-free bond's price, based only on its duration:

A) will be too small.

B) will be too large.

C) may be either too small or too large.

Question #2 of 14 Question ID: 1210981

Three companies in the same industry have exhibited the following average ratios over a 5-year period:

5-Year Averages Alden Barrow Collison

Operating margin 13.3% 15.0% 20.7%

Debt/EBITDA 4.6× 0.9× 2.8×

EBIT/interest 3.6× 8.9× 5.7×

FFO/debt 12.5% 14.6% 11.5%

Debt/capital 60.8% 23.6% 29.6%

Based only on the information given, the company that most likely has the highest credit rating is:

A) Alden.

B) Barrow.
C) Collison.

Question #3 of 14 Question ID: 1210970

The difference between a convertible bond and a bond with warrants is that a bondholder who exercises warrants:

A) does not pay cash for the common stock.

B) obtains common stock at a lower price per share.
28
 C) continues to hold the bond after exercising the warrants.

Question #4 of 14 Question ID: 1210969

Which of the following is least likely a common form of external credit enhancement?

A) Overcollateralization.
B) A corporate guarantee.

C) A letter of credit from a bank.

Question #5 of 14 Question ID: 1210976

Nonconforming mortgage loans may be securitized by:

A) government-sponsored enterprises, but not by private companies.

B) private companies, but not by government-sponsored enterprises.

C) neither private companies nor government-sponsored enterprises.

Question #6 of 14 Question ID: 1210978

Which of the following bonds would appreciate the most if the yield curve shifts down by 50 basis points at all maturities?

A) 4-year 8%, 8% YTM.

B) 5-year 8%, 7.5% YTM.

C) 5-year 8.5%, 8% YTM.

Question #7 of 14 Question ID: 1210971

Which of the following provisions would most likely increase the required yield to maturity on a debt security?

A) Call option.
B) Put option.

C) Floor on a floating-rate security.

29
Question #8 of 14 Question ID: 1210982

Other things equal, a corporate bond's yield spread is likely to be most volatile if the bond is rated:

A) AA with 5 years to maturity.

B) AAA with 3 years to maturity.

C) BBB with 15 years to maturity.

Question #9 of 14 Question ID: 1210973

In a repurchase agreement, the repo rate is likely to be higher:

A) if delivery to the lender is required.

B) when the quality of the collateral is high.

C) for longer-dated repos.

Question #10 of 14 Question ID: 1210979

An investor in longer-term coupon bonds who has a short investment horizon is most likely:

A) more concerned with market price risk than reinvestment risk.

B) more concerned with reinvestment risk than market price risk.

C) equally concerned about market price risk and reinvestment risk.

Question #11 of 14 Question ID: 1210975

A bank loan department is trying to determine the correct rate for a 2-year loan to be made two years from now. If current implied
Treasury effective annual spot rates are 1-year = 2%, 2-year = 3%, 3-year = 3.5%, and 4-year = 4.5%, the base (risk-free)
forward rate for the loan before adding a risk premium is closest to:

A) 4.5%.
B) 6.0%.

C) 9.0%.

Question #12 of 14 Question ID: 1210980

Coyote Corporation has an issuer credit rating of AA, but its most recently issued bonds have an issue credit rating of AA–. This
difference is most likely due to the newly issued bonds having: 30
 A) been issued as senior subordinated debt.
B) been affected by restricted subsidiary status.
C) additional covenants that protect the bondholders.

Question #13 of 14 Question ID: 1210972

An institution is most likely to be restricted from investing in which of the following fixed income classifications?

A) High yield.
B) Index-linked.
C) Floating-rate.

Question #14 of 14 Question ID: 1210974

Annual-pay yields of annual-coupon sovereign bonds are as follows:

Maturity and Coupon Yield to Maturity

1-year, 5% coupon 2.342%

1-year, 0% coupon 2.350%

2-year, 5% coupon 2.496%

2-year, 0% coupon 2.500%

3-year, 5% coupon 2.711%

3-year, 0% coupon 2.725%

The 3-year, 5% annual coupon bond is most likely:

A) overvalued.
B) undervalued.
C) fairly valued.

31
 CFA Level I

Question #1 of 7 Question ID: 1210985

Which of the following derivatives positions replicates investing at the risk-free rate?

A) Holding an asset and a short position in a forward contract on the asset.

B) Holding an asset and a long position in a forward contract on the asset.

C) Selling an asset short and holding a short position in a forward contract on the asset.

Question #2 of 7 Question ID: 1210986

Compared to an asset with no net cost of carry, holding costs that are greater than benefits:

A) increase the no-arbitrage price of the forward contract.

B) decrease the no-arbitrage price of the forward contract.

C) have no effect on the no-arbitrage price of the forward contract.

Question #3 of 7 Question ID: 1210988

The value of a call option on a stock is most likely to decrease as a result of:

A) an increase in asset price volatility.

B) a decrease in the risk-free rate of interest.

C) a decrease in the exercise price of the option.

Question #4 of 7 Question ID: 1210987

In which of the following ways is an interest rate swap different from a series of forward rate agreements (FRAs)?

A) The FRAs that replicate an interest rate swap may be off-market contracts.

32
 B) The fixed rate is known at initiation for an interest rate swap but not for a series of
FRAs.
C) An interest rate swap may have a nonzero value at initiation, while FRAs must have a
value of zero at initiation.

Question #5 of 7 Question ID: 1210983

It is least likely that a forward contract:

A) has counterparty risk.

B) can be settled in cash.
C) requires a margin deposit.

Question #6 of 7 Question ID: 1210989

With respect to European and American options, cash flows from the underlying asset may make:

A) a European put more valuable than an otherwise identical American put.

B) an American put more valuable than an otherwise identical European put.

C) an American call more valuable than an otherwise identical European call.

Question #7 of 7 Question ID: 1210984

Cash flows related to futures margin least likely include:

A) interest on the margin loan.

B) deposits to meet margin calls.

C) interest received on collateral.

33
 CFA Level I

Question #1 of 7 Question ID: 1210992

Survivorship bias in reported hedge fund index returns will most likely result in index:

A) returns and risk that are biased upward.

B) returns and risk that are biased downward.

C) risk that is biased downward and returns that are biased upward.

Question #2 of 7 Question ID: 1210993

A hedge fund with a 2 and 20 fee structure has a hard hurdle rate of 5%. If the incentive fee and management fee are calculated
independently and the management fee is based on beginning-of-period asset values, an investor's net return over a period
during which the gross value of the fund has increased 22% is closest to:

A) 16.4%.
B) 16.6%.

C) 17.0%.

Question #3 of 7 Question ID: 1210994

The least appropriate measure of risk for alternative investments is:

A) value at risk (VaR).

B) the Sortino ratio.

C) variance of returns.

Question #4 of 7 Question ID: 1210990

The type of real estate index that most likely exhibits sample selection bias is:

34
 A) REIT index.
B) appraisal index.
C) repeat sales index.

Question #5 of 7 Question ID: 1210991

With respect to mezzanine-stage financing in venture capital investing and mezzanine financing of a leveraged buyout:

A) mezzanine-stage financing refers to a type of security but mezzanine financing does

not.
B) mezzanine financing refers to a type of security but mezzanine-stage financing does
not.
C) both terms refer to financing by issuance of securities that have both debt and equity
characteristics.

Question #6 of 7 Question ID: 1210995

A hedge fund that engages primarily in distressed debt investing and merger arbitrage is best described as using:

A) a macro strategy.
B) an event-driven strategy.

C) a relative value strategy.

Question #7 of 7 Question ID: 1210996

The type of investment most often used to gain exposure to commodity prices is a portfolio of:

A) derivative securities.

B) physical commodities.
C) commodity producing companies.

35
 CFA Level I

Question #1 of 7 Question ID: 1210948

Which of the following activities is most likely to be performed as part of the execution step of the portfolio management
process?

A) Completion of the investment policy statement.

B) Top-down analysis based on macroeconomic conditions.

C) Rebalancing the portfolio to the desired asset class exposures.

Question #2 of 7 Question ID: 1210950

A manager who evaluates portfolios' investment performance adjusted for systematic risk is most likely to rank portfolios based
on their:

A) Sharpe ratios.
B) Treynor measures.

C) M-squared measures.

Question #3 of 7 Question ID: 1210954

Neural networks are an example of:

A) machine learning.
B) artificial intelligence.

C) algorithmic trading applications.

Question #4 of 7 Question ID: 1210953

Which of the following risk management strategies is most accurately described as shifting a risk?

36
 A) A retail store owner buys a fire insurance policy on the building.
B) A farmer takes a short position in a futures contract to deliver wheat.
C) A portfolio manager diversifies her investments across different industries.

Question #5 of 7 Question ID: 1210951

An analyst has estimated that the returns for an asset, conditional on the performance of the overall economy, are:

Return Probability Economic Growth

5% 20% Poor

10% 40% Average

14% 40% Good

The conditional expected returns on the market portfolio are:

Return Probability Economic Growth

2% 20% Poor

10% 40% Average

15% 40% Good

According to the CAPM, if the risk-free rate is 5% and the risky asset has a beta of 1.1, with respect to the market portfolio, the
analyst should:

A) sell (or sell short) the risky asset because its expected return is less than equilibrium
expected return on the market portfolio.
B) buy the risky asset because the analyst expects the return on it to be higher than its
required return in equilibrium.

C) sell (or sell short) the risky asset because its expected return is not sufficient to
compensate for its systematic risk.

Question #6 of 7 Question ID: 1210949

Portfolios that plot inside the minimum-variance frontier represent:

A) efficient portfolios.

B) inefficient portfolios.
C) unattainable portfolios.

37
Question #7 of 7 Question ID: 1210952

A written investment policy statement should most appropriately:

A) establish a target asset allocation strategy.

B) focus predominantly on a long-term time horizon.

C) include risk objectives that are consistent with the investor’s return requirements.

38