V1 Exam 2 PM

CFA Level I

Question #1 of 120 Question ID: 1207634

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

Gabe Klein, CFA, an analyst for HB Investments, is responsible for the valuation model for an IPO. Without his knowledge, others at HB
adjusted the inputs to the model to increase the estimated value of the shares, and the offering is oversubscribed. Complying with local
securities laws, Klein purchases shares of the IPO for his personal account and allocates the remaining shares to client accounts on a
pro rata basis. With regard to the Standard on knowledge of the law, the analyst:

A) did not violate the Standard.

B) violated the Standard by purchasing the shares of the IPO but not by allowing the IPO
valuation to be published.

C) violated the Standard by allowing the IPO valuation to be published and by purchasing the
shares of the IPO.

Question #2 of 120 Question ID: 1207637

Green Investments utilizes the CFA Institute Standards of Professional Conduct as their standards for ethical practice. For purposes of
compliance, which of the following is least likely a violation of Green Investments' policies?

A) One of Green Investments’ marketing brochures states that several of the firm’s portfolio
managers passed all three levels of the CFA exam on their first attempts.
B) At a meeting with potential clients, Green’s chief investment officer states that he is among a
group of the most qualified investment professionals because he holds the CFA charter.

C) In interviewing a prospective employee, a portfolio manager at the firm says that the position
could be financially rewarding because CFA charterholders are known to achieve superior
performance results.

Question #3 of 120 Question ID: 1207631

Charmaine Townsend, CFA, has been managing equity portfolios for clients using a model that identifies growth companies selling at
reasonable multiples. With economic growth slowing for the foreseeable future, she has decided to change to a securities selection
model that emphasizes dividend income and low valuation. To comply with the Code and Standards, Townsend should most
appropriately:

A) promptly notify her clients of the change.

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B) get written permission from her clients prior to the change.
C) get written acknowledgment of the change from her clients within a reasonable period of time
after the change is made.

Question #4 of 120 Question ID: 1207628

Wells Investments implements a new procedure for unsolicited trade requests that an advisor believes are inconsistent with the client's
IPS:

If the trade will have only a minimal impact on the client's portfolio, first advise the client in what way the trade deviates from the IPS,
and then request the client's approval for the trade.
If the trade will have a material impact on the risk and return characteristics of the client's portfolio, discuss with the client that this
trade will require a change in the IPS.

Which of these statements is consistent with the standard concerning suitability?

A) Both of these statements.

B) Neither of these statements.
C) Only one of these statements.

Question #5 of 120 Question ID: 1207625

With respect to the Standard on material nonpublic information, materiality is least likely to be affected by:

A) the source of the information.

B) liquidity of the subject security.
C) ambiguity about the price effect of the information.

Question #6 of 120 Question ID: 1207632

Alberto Cosini is the top-rated, sell-side analyst in the biotechnology industry. His recommendations significantly affect prices of industry
stocks regularly. Yesterday Cosini changed his rating on Biopharm from "hold" to "buy," and Cosini's firm emailed the change to its
clients although no public disclosure has yet been made. If Peter Allen, CFA, who heard about Cosini's rating change for Biopharm from
his brother, purchases Biopharm in his personal account, Allen will most likely:

A) not violate the Standards.

B) violate the Standard concerning diligence and reasonable basis.
C) violate the Standard concerning material nonpublic information.

Question #7 of 120 Question ID: 1207623

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Judy Dudley, CFA, is an analyst and plans to visit a company that she is analyzing in order to prepare a research report. The Standard
related to independence and objectivity:

A) requires Dudley to pay for her own transportation costs and not to accept any gifts or
compensation for writing the report, but allows her to accept accommodations and meals that
are not lavish.
B) requires Dudley not to accept any compensation for writing a research report, but allows her
to accept company paid transportation, lodging, and meals.
C) allows Dudley to accept transportation, lodging, expenses, and compensation for writing a
research report, but requires that she disclose such an arrangement in her report.

Question #8 of 120 Question ID: 1207633

Campbell Hill, CFA, has recently accepted the position of Chief Compliance Officer at an investment management firm. Hill distributes a
memo stating that effective immediately (1) material supporting all company research reports will be kept in the company database in
electronic form for 10 years, and hard copies of the same material will be maintained for one year only, and (2) hard copy records of all
trade confirmations sent to clients must be kept on file for five years, the period mandated by local regulations. With respect to record
retention:

A) neither of Hill’s policies violates the Standards.

B) Hill’s policies regarding both research reports and trade confirmations violate the Standards.
C) Hill’s policy regarding research reports does not violate the Standards, but the policy
regarding trade confirmations does.

Question #9 of 120 Question ID: 1207639

In calculating total firm assets for a GIPS-compliant performance statement, Allen Bund, CFA, finds that there is a mix of fee-paying and
non-fee-paying accounts, some of which are discretionary and some of which are non-discretionary accounts. Should Bund include non-
discretionary accounts and non-fee-paying accounts in the calculation of total firm assets?

Non-discretionary accounts Non-fee-paying accounts

A) Yes Yes

B) No Yes

C) No No

Question #10 of 120 Question ID: 1207627

Dawn Shepard, CFA, is a broker for a regional brokerage firm. Her company's research department recently changed its
recommendation on the common stock of Orlando (ORL) from "buy" to "sell" and sent the change to all firm clients who own ORL. The
next day, a client places a "buy" order for ORL. According to the Standards, under these circumstances, Shepard:
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A) must advise the customer of the change in recommendation before accepting the order.
B) has complied with the fair dealing Standard and may accept the order because it is
unsolicited.
C) may accept the order only if the customer acknowledges in writing that she was notified of
the change in the recommendation.

Question #11 of 120 Question ID: 1207635

Paul James, CFA, a retail stock broker, notices that one client in particular, Chet Young, Ph.D., is especially adept at picking stocks.
James decides to replicate Young's trades in his own account after he enters them. By doing so, James:

A) is not in violation of any Standards.

B) is in violation of the Standard on priority of transactions because he is front running the
client’s account.
C) is in violation of the Standard on misconduct because he has misappropriated confidential
client information.

Question #12 of 120 Question ID: 1207624

Nicholas Hart, CFA, is a portfolio manager for individuals. Last year, Hart's wife was hospitalized for several months. Despite his best
efforts to pay her bills, Hart was forced to declare personal bankruptcy but did not disclose this to his clients. According to the CFA
Institute Standards of Professional Conduct, Hart:

A) is not in violation of any Standard.

B) is in violation of the Standard on communication with clients for not disclosing his bankruptcy
to his clients.
C) is in violation of the Standard on misconduct for personal conduct that reflects adversely on
his professional reputation.

Question #13 of 120 Question ID: 1207636

Marie Marshall, CFA, charges clients a management fee and commissions on securities transactions. Marshall receives an annual
bonus based on the overall success of the firm and a quarterly bonus based on the trading volume in her clients' accounts. If Marshall
does not tell clients about her compensation package, she is violating the Standard concerning:

A) disclosure of conflicts.

B) communication with clients.

C) additional compensation arrangements.
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Question #14 of 120 Question ID: 1207640

Lunar Wealth, a subsidiary of Galaxy Financial, has prepared GIPS- compliant performance data and asks Galaxy's president about his
interest in presenting GIPS-compliant performance data, but he does not believe it is a priority. Lunar may:

A) claim partial compliance with GIPS if Lunar’s performance presentations are in compliance.
B) not claim compliance with GIPS because compliance must be made on a company-wide
basis.
C) claim compliance with GIPS as long as Lunar is presented to the public as a distinct
business entity.

Question #15 of 120 Question ID: 1207629

Fred Reilly, CFA, is an investment advisor. Roger Harrison, a long-term client of Reilly, decides to move his accounts to a new firm. In
his review of Harrison's account history, Reilly discovers some transfers of funds from the account of Harrison's company that Reilly
suspects were illegal. Which of the following actions is most appropriate for Reilly to take under the Standards?

A) Discuss his suspicions with outside counsel.

B) Inform Harrison’s company of the suspected illegal activities because Harrison is no longer a
client.
C) Do nothing because he must maintain the confidentiality of client information even after the
client has left the firm.

Question #16 of 120 Question ID: 1207626

Fred Dean, CFA, has just taken a job as trader for LPC. One of his first assignments is to execute the purchase of a block of East Street
Industries. While working with East Street on an assignment for his previous employer, he learned that East Street's sales have
weakened and will likely be significantly below the LPC analyst's estimate, but no public announcement of this has been made. Which of
the following actions would be the most appropriate for Dean to take according to the Standards?

A) Contact East Street’s management and urge them to make the information public and make
the trade if they refuse.

B) Request that the firm place East Street’s stock on a restricted list and decline to make any
trades of the company’s stock.

C) Post the information about the drop in sales on an internet bulletin board to achieve public
dissemination and inform his supervisor of the posting.

Question #17 of 120 Question ID: 1207630

When members and candidates report performance data, according to the Code and Standards, it is:

A) permissible to leave details out in a brief presentation.

B) recommended that a minimum of five years performance history be included.
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C) a requirement to present composite performance rather than individual account performance.

Question #18 of 120 Question ID: 1207638

Bob Sampson is the head portfolio manager for Global Equities, which has been in existence for eight years. Beginning this year, the
firm has decided to present performance information in compliance with GIPS. To claim GIPS compliance, the firm must present at least:

A) eight years of GIPS-compliant performance information.

B) five years of GIPS-compliant performance information with no additional disclosure required
for prior years.

C) five years of GIPS-compliant performance information and may include noncompliant

performance information for the prior three years in the “Disclosures” section.

Question #19 of 120 Question ID: 1207641

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

An investor wants to receive $10,000 annually for ten years with the first payment five years from today. If the investor can earn a 14%
annual return, the amount that she will have to invest today is closest to:

A) $27,091.
B) $30,884.
C) $52,161.

Question #20 of 120 Question ID: 1207642

Which of the following statements about the frequency distribution shown below is least accurate?

Return Interval Frequency

0% to 5% 10

> 5% to 10% 20

> 10% to 15% 30

> 15% to 20% 20

A) The return intervals are mutually exclusive.

B) The cumulative absolute frequency of the fourth interval is 20.
C) The relative frequency of the second return interval is 25%.

Question #21 of 120 Question ID: 1207644

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An analyst obtains the following annual returns for a group of stocks: 10%, 8%, 7%, 9%, 10%, 12%, 11%, 10%, 30%, and 13%. This
distribution:

A) has a median greater than its mode.

B) is skewed to the right, and the mean is less than the median.

C) is skewed to the right, and the mean is greater than the mode.

Question #22 of 120 Question ID: 1207645

An analyst gathers the following data about the mean monthly returns of three securities:

Security Mean Monthly Return Standard Deviation

X 0.9 0.7

Y 1.2 4.7

Z 1.5 5.2

Which security has the highest level of relative risk as measured by the coefficient of variation?

A) X.
B) Y.
C) Z.

Question #23 of 120 Question ID: 1207643

The median of a distribution is least likely equal to:

A) the second quartile.

B) the third quintile.

C) the fifth decile.

Question #24 of 120 Question ID: 1207646

Which of the following statements about probability concepts is most accurate?

A) Subjective probability is a probability that is based on personal judgment.

B) A conditional probability is the probability that two or more events happen concurrently.

C) An empirical probability is one based on logical analysis rather than on observation or

personal judgment.
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Question #25 of 120 Question ID: 1207652

For a test with sample size n of whether two variables are correlated, the critical values are based on:

A) n degrees of freedom.
B) n – 1 degrees of freedom.
C) n – 2 degrees of freedom.

Question #26 of 120 Question ID: 1207647

Alex White, CFA, is examining a portfolio that contains 100 stocks that are either value or growth stocks. Of these 100 stocks, 40% are
value stocks. The previous portfolio manager had selected 70% of the value stocks and 80% of the growth stocks. What is the
probability of selecting a stock at random that is either a value stock or was selected by the previous portfolio manager?

A) 28%.
B) 76%.
C) 88%.

Question #27 of 120 Question ID: 1207648

Which of the following statements about the normal distribution is least accurate? The normal distribution:

A) has a mean of zero and a standard deviation of one.

B) is completely described by its mean and standard deviation.
C) is bell-shaped, with tails extending without limit to the left and to the right.

Question #28 of 120 Question ID: 1207649

A manager forecasts a bond portfolio return of 10% and estimates a standard deviation of annual returns of 4%. Assuming a normal
returns distribution and that the manager is correct, there is:

A) a 90% probability that the portfolio return will be between 3.2% and 17.2%.
B) a 95% probability that the portfolio return will be between 2.16% and 17.84%.

C) a 32% probability that the portfolio return will be between 6% and 14%.

Question #29 of 120 Question ID: 1207650

An investment has an expected return of 10% with a standard deviation of 5%. If the returns are normally distributed, the probability of
losing money is closest to:
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A) 2.5%.

B) 5.0%.
C) 16.0%.

Question #30 of 120 Question ID: 1207651

Which of the following statements about sampling and estimation is least accurate?

A) Sampling error is the difference between the observed value of a statistic and the value it is
intended to estimate.
B) A simple random sample is a sample obtained in such a way that each element of the
population has an equal probability of being selected.
C) The central limit theorem states that the sample mean for a large sample size will have a
distribution that is the same as the distribution of the underlying population.

Question #31 of 120 Question ID: 1207659

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

The crowding-out effect suggests that:

A) government borrowing will lead to an increase in private savings.

B) as government spending increases, so will incomes and taxes, and the higher taxes will
reduce both aggregate demand and output.

C) greater government deficits will drive up interest rates, thereby reducing private investment.

Question #32 of 120 Question ID: 1207664

Consider two currencies, the WSC and the BDR. The spot WSC/BDR exchange rate is 2.875, the 180-day riskless WSC rate is 1.5%,
and the 180-day riskless BDR rate is 3.0%. The 180-day forward exchange rate that will prevent arbitrage profits is closest to:

A) 2.833 WSC/BDR.
B) 2.854 WSC/BDR.
C) 2.918 WSC/BDR.

Question #33 of 120 Question ID: 1207654

An advantage of the Herfindahl-Hirschman Index (HHI) over the N-firm concentration ratio as a summary measure of the market
structure of an industry is that the HHI is more sensitive to:
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A) mergers.
B) barriers to entry.

C) elasticity of demand.

Question #34 of 120 Question ID: 1207658

Which of the following does the U.S. central bank most often use to change the money supply?

A) The discount rate.

B) Open market operations.
C) The required reserve ratio.

Question #35 of 120 Question ID: 1207653

The price of milk in a country increases from €1.00 per liter to €1.10 per liter, and the quantity supplied does not change. This suggests
the elasticity of the short-run supply of milk in this country is equal to:

A) infinity, and supply is perfectly elastic.

B) zero, and supply is perfectly inelastic.

C) infinity, and supply is perfectly inelastic.

Question #36 of 120 Question ID: 1207657

In the short run, will an increase in the money supply increase the price level and real output?

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 #37 of 120 Question ID: 1207662

The country of Colfax can produce 15 units of rice or 10 units of plastic per day of labor. The country of Birklund can produce 18 units of
rice or 12 units of plastic per day of labor. With regard to potential benefits of trading rice and plastic between Colfax and Birklund:

A) there are no potential gains from trade.

B) Colfax should produce and trade rice for Birklund’s plastic.

C) Birklund should produce and trade rice for Colfax’s plastic.
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Question #38 of 120 Question ID: 1207661

The public sector is most likely to increase as a proportion of economic output if fiscal policy:

A) and monetary policy are both expansionary.

B) is contractionary and monetary policy is expansionary.

C) is expansionary and monetary policy is contractionary.

Question #39 of 120 Question ID: 1207663

Unlike members of free trade areas, customs union members:

A) adopt a single currency.

B) remove barriers to trade with all members.
C) adopt uniform trade restrictions with non-members.

Question #40 of 120 Question ID: 1207656

A perfectly elastic aggregate supply curve represents:

A) the productive capacity of an economy at full employment.

B) the production decisions of firms only in the very short run.
C) the short-run relationship between output and the price level.

Question #41 of 120 Question ID: 1207660

Reasons why the unemployment rate is a lagging indicator of the business cycle least likely include:

A) discouraged workers who begin seeking work.

B) action lag in the implementation of unemployment insurance.
C) high costs to employers of frequently hiring or firing employees.

Question #42 of 120 Question ID: 1207655

A natural monopoly is most likely to exist when:

A) economies of scale are great.

B) average total cost increases as output increases.
C) a single firm owns essentially all of a productive resource.
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Question #43 of 120 Question ID: 1207668

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

A company has the following sequence of events regarding its stock:

The company had 1,000,000 shares outstanding at the beginning of the year.
On June 30, the company declared and issued a 10% stock dividend.
On September 30, the company sold 400,000 shares of common stock at par.

The number of shares that should be used to compute basic earnings per share at year end is:

A) 1,000,000.
B) 1,100,000.
C) 1,200,000.

Question #44 of 120 Question ID: 1207671

Time-series analysis of a firm's common-size balance sheets reveals the following data:

20X3 20X4 20X5

Current assets 20% 22% 25%

Inventory 8% 9% 11%

Short-term debt 10% 11% 12%

Long-term debt 24% 21% 18%

Based only on the data provided, an analyst can conclude that the firm's:

A) debt ratio is decreasing.

B) quick ratio is decreasing.
C) inventory/sales ratio is increasing.

Question #45 of 120 Question ID: 1207672

Which of the following statements about the analysis of cash flows is least accurate?

A) Interest payments on debt are not a financing cash flow under U.S. GAAP.
B) Both the direct and indirect methods involve adding back noncash items such as
depreciation and amortization.
C) When using the indirect method, an analyst should add any losses on the sales of fixed
assets to net income.
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Question #46 of 120 Question ID: 1207676

A company that reports under U.S. GAAP and changes its inventory cost assumption from weighted average cost to last-in first-out is
required to apply this change in accounting principle:

A) retrospectively, and disclose the new cost flow method being used.
B) prospectively, and explain the reasons for the change in the financial statement disclosures.
C) retrospectively, and explain the reasons for the change in the financial statement disclosures.

Question #47 of 120 Question ID: 1207721

For which of the following investments in securities is a firm most likely to report unrealized gains or losses on its income statement?

A) Preferred stock, which the firm classifies as available-for-sale.

B) Five-year bonds, which the firm purchased in a private placement.
C) Listed call options, which the firm intends to exercise at expiration.

Question #48 of 120 Question ID: 1207667

Consider a manufacturing company and a financial services company. Interest expense is most likely classified as a non-operating
component of net income for:

A) both of these companies.

B) neither of these companies.
C) only one of these companies.

Question #49 of 120 Question ID: 1207666

The two primary assumptions in preparing financial statements under IFRS are:

A) accrual accounting and going concern.

B) reasonable accuracy and accrual accounting.
C) going concern and reasonable accuracy.

Question #50 of 120 Question ID: 1207681

Forman, Inc., and Swoft, Inc., both operate within the same industry. Forman's stated strategy is to differentiate its premium products
relative to its competitors, while Swoft is a low-cost producer. Given the companies' stated strategies, Forman most likely has:

A) higher gross margins relative to Swoft.

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B) lower advertising expenses relative to Swoft.
C) lower research and development expenses relative to Swoft.

Question #51 of 120 Question ID: 1207669

An analyst gathered the following data about a company:

1,000 common shares are outstanding (no change during the year).
Net income is $5,000.
The company paid $500 in preferred dividends.
The company paid $600 in common dividends.
The average market price of their common stock is $60 for the year.
The company had 100 warrants (for one share each) outstanding for the entire year, exercisable at $50.

The company's diluted earnings per share is closest to:

A) $4.42.
B) $4.55.
C) $4.83.

Question #52 of 120 Question ID: 1207665

Which of the following sources of information should an analyst consider the least reliable?

A) Form 10-Q.

B) Proxy statement.
C) Corporate press release.

Question #53 of 120 Question ID: 1207678

A company takes a $10 million impairment charge on a depreciable asset in 20X3. The most likely effect will be to:

A) increase reported net income in 20X4.

B) decrease net income and taxes payable in 20X3.
C) increase return on equity and operating cash flow in 20X4.

Question #54 of 120 Question ID: 1207679

Xanos Corporation faced a 50% marginal tax rate last year and showed the following financial and tax reporting information:

Deferred tax asset of $1,000.

Deferred tax liability of $5,000.
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Based only on this information and the news that the tax rate will decline to 40%, Xanos Corporation's deferred tax:

A) asset will be reduced by $400 and deferred tax liability will be reduced by $2,000.
B) liability will be reduced by $1,000 and income tax expense will be reduced by $800.
C) asset will be reduced by $200 and income tax expense will be reduced by $1,000.

Question #55 of 120 Question ID: 1207680

The ratio of operating cash flow to net income is most likely to indicate low quality of earnings when it is:

A) less than one.

B) highly variable.
C) increasing over time.

Question #56 of 120 Question ID: 1207677

A company that capitalizes costs instead of expensing them will have:

A) higher income variability and higher cash flows from operations.

B) lower cash flows from investing and lower income variability.
C) lower cash flows from operations and higher profitability in early years.

Question #57 of 120 Question ID: 1207674

Al Pike, CFA, is analyzing Red Company by projecting pro forma financial statements. Pike expects Red to generate sales of $3 billion
and a return on equity of 15% in the next year. Pike forecasts that Red's total assets will be $5 billion and that the company will maintain
its financial leverage ratio of 2.5. Based on these forecasts, Pike should project Red's net income to be:

A) $100 million.
B) $300 million.
C) $500 million.

Question #58 of 120 Question ID: 1207670

Which of the following items would affect owners' equity and also appear on the income statement?

A) Dividends paid to shareholders.

B) Unrealized gains and losses on trading securities.

C) Unrealized gains and losses on available-for-sale securities.

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Question #59 of 120 Question ID: 1207673

Copper, Inc., had $4 million in bonds outstanding that were convertible into common stock at a conversion rate of 100 shares per $1,000
bond. In 20X1, all of the outstanding bonds were converted into common stock. Copper's average share price for 20X1 was $15.
Copper's statement of cash flows for the year ended December 31, 20X1, should most likely include:

A) a footnote describing the conversion of the bonds into common stock.

B) cash flows from financing of +$4 million from issuance of common stock and –$4 million from
retirement of bonds.

C) cash flows from financing of +$6 million from issuance of common stock and –$4 million from
retirement of bonds and cash flows from investing of –$2 million for a loss on retirement of
bonds.

Question #60 of 120 Question ID: 1207675

During a period of falling costs of manufacturing, which of the following inventory cost formulas would result in the greatest reported net
income?

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

Question #61 of 120 Question ID: 1207685

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

An analyst identifies the following cash flows for an average-risk project:

Year 0 −$5,000

Year 1-2 $1,900

Year 3 $2,500

Year 4 $2,000

If the company's cost of capital is 12%, the project's discounted payback period is closest to:

A) 2.5 years.
B) 3.0 years.
C) 3.9 years.

Question #62 of 120 Question ID: 1207691

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Mary Miller, CFA, manages the short-term cash position for Young Company. Miller can invest in one of three securities that will mature
in 180 days: a Treasury bill priced at 97.5% of par, commercial paper with a bond-equivalent yield of 5.10%, and a 6-month certificate of
deposit that will return 2.5% over the 180-day holding period. Miller should purchase:

A) the Treasury bill.

B) the commercial paper.
C) the certificate of deposit.

Question #63 of 120 Question ID: 1207687

Which of the following is the least appropriate method for estimating a firm's before-tax cost of debt capital?

A) Use the market yield on bonds with a rating and maturity similar to the firm’s existing debt.
B) Assume the firm’s cost of debt capital is equal to the yield to maturity on its publicly traded
debt.
C) Use the coupon rate on the firm’s most recently issued debt.

Question #64 of 120 Question ID: 1207689

Paul Dufray, CFA, is estimating the asset beta for a new project based on a firm that primarily makes and sells a similar product. In
addition to the beta of that firm, Dufray will need to estimate the firm's:

A) sales risk and financial risk.

B) debt-to-equity ratio and tax rate.
C) operating leverage and financial leverage.

Question #65 of 120 Question ID: 1207682

Stakeholder theory is most accurately described as the belief that corporate governance should focus on managing:

A) the activities of a company in the best interests of its owners.

B) employee activities in compliance with ethical standards and applicable laws.
C) conflicts among different groups that have an interest in a company’s activities.

Question #66 of 120 Question ID: 1207692

Which of the following working capital management outcomes is least desirable?

A) Low operating cycle.

B) High inventory turnover.
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C) High cash conversion cycle.

Question #67 of 120 Question ID: 1207686

Which of the following is least likely a problem associated with the internal rate of return (IRR) method of choosing investment projects?

A) Using IRR to rank mutually exclusive projects assumes reinvestment of cash flows at the
IRR.
B) For independent projects, the IRR and NPV can lead to different investment decisions.
C) If the project has an unconventional cash flow pattern, the result can be multiple IRRs.

Question #68 of 120 Question ID: 1207690

Break points in a firm's marginal cost of capital schedule are best interpreted as representing:

A) the maximum amounts of debt, preferred stock, and common stock the firm can issue.
B) the amounts of new securities a firm would need to issue to take advantage of flotation cost
discounts.

C) the amounts of capital expenditure at which the company’s weighted average cost of capital
increases.

Question #69 of 120 Question ID: 1207683

With regard to environmental, social, and governance (ESG) considerations, which of the following statements is most accurate?

A) Fiduciary duty requires managers to integrate their clients’ ESG-related considerations into
investment decisions.
B) Integrating ESG factors into the analysis of a company’s risk and return characteristics is not
considered a violation of fiduciary duty.
C) A “values-based” objective involves investing in companies that have ESG-related
opportunities that are not fully reflected in their share prices.

Question #70 of 120 Question ID: 1207688

Janet Adams, CFA, is reviewing Rival Company's financial statements. Rival's long-term debt totals $35 million, while total shareholder
equity equals $140 million. Rival's long-term debt has a YTM of 9%. Rival's tax rate is 40% and its beta is 0.9. Adams gathers the
following additional facts:

Treasury bills earn 4.0%.

The equity risk premium is 4.5%.
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Based on the information provided, Rival's weighted average cost of capital is closest to:

A) 4.6%.
B) 7.5%.
C) 8.2%.

Question #71 of 120 Question ID: 1207684

Bear Company produces gravel-hauling equipment. The company recently began producing the Mauler, a new line of equipment. Prior
to beginning production of the Mauler, the company spent $10 million in research and development costs. Bear expects the Mauler line
to generate positive cash flows beginning in the fourth year. However, Bear is forecasting a one-time expense in year 5 to comply with
new government emission standards. The company will use an empty building it already owns to produce the Mauler. When analyzing
the project cash flows for the Mauler, Bear should least appropriately include:

A) the use of the empty building.

B) the research and development cost.
C) the compliance cost for emissions standards.

Question #72 of 120 Question ID: 1207693

An analyst has calculated the following statistics for Company X and Company Y.

Company X Company Y

Year 1 Year 2 Year 1 Year 2

Number of days of inventory 18 22 33 24

Number of days of receivables 14 16 14 12

Number of days of payables 19 20 18 20

The net operating cycle for:

A) Company Y was 16 days in year 2, an improvement in liquidity compared to year 1.

B) Company Y was 36 days in year 2, a decline in liquidity compared to year 1.
C) Company X was 18 days in year 2, an improvement in liquidity compared to year 1.

Question #73 of 120 Question ID: 1207695

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

Which of the following statements about types of orders is least accurate?

A) Market orders are orders to buy or sell at the best price available.
B) Limit orders are orders to buy or sell at or away from the market price.
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C) A stop buy order is typically used to protect a short position in a security and is placed below
the current market price.

Question #74 of 120 Question ID: 1207706

A stock has the following data associated with it:

A required rate of return of 14%.

A return on equity of 15%.
An earnings retention rate of 40%.

The stock's justified price-to-earnings ratio is closest to:

A) 5.0.
B) 6.7.

C) 7.5.

Question #75 of 120 Question ID: 1207704

The required rate of return used in the dividend discount model is least likely to be affected by a change in:

A) the expected rate of inflation.

B) the real risk-free rate of return.
C) the growth rate of earnings and dividends.

Question #76 of 120 Question ID: 1207702

High return on invested capital and high pricing power are most likely to be associated with an industry that has:

A) high capacity.
B) low barriers to entry.
C) high concentration.

Question #77 of 120 Question ID: 1207699

With regard to the implications of stock market efficiency for technical analysis and fundamental analysis, if market prices are:

A) weak-form efficient, technical analysis that depends only on past trading data should be of
limited or no value.
B) semistrong-form efficient, fundamental analysis using the top-down approach should yield
consistently superior returns.
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C) semistrong-form efficient, fundamental analysis using only publicly available market
information should generate abnormal returns after considering risk and transaction costs.

Question #78 of 120 Question ID: 1207705

The following data pertains to a firm's common stock:

The stock will pay no dividends for two years.

The dividend three years from now is expected to be $1.
Dividends are expected to grow at a 7% rate from that point onward.

If an investor requires a 17% return on this investment, how much will the investor be willing to pay for this stock now?

A) $6.24.
B) $7.31.
C) $8.26.

Question #79 of 120 Question ID: 1207707

A stock's price currently is $100. An analyst forecasts the following for the stock:

The normalized trailing price earnings (P/E) ratio will be 12×.

The stock is expected to pay a $5 dividend this coming year on projected earnings of $10 per share.

If the analyst were to buy and hold the stock for the year, the projected rate of return based on these forecasts is closest to:

A) 15%.
B) 20%.
C) 25%.

Question #80 of 120 Question ID: 1207694

Which of the following statements about short sales is least accurate?

A) Proceeds from short sales cannot be withdrawn from the account.

B) The short seller must pay the lender of the stock any dividends paid by the company.
C) The short seller is required to replace the borrowed securities within six months of a short
sale.

Question #81 of 120 Question ID: 1207701

Which of the following firms' earnings are likely to exhibit the greatest degree of sensitivity to the business cycle?
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A) Furniture producer with high fixed costs as a proportion of total costs.
B) Entertainment producer with high variable costs as a proportion of total costs.
C) Food and beverage producer with high fixed costs as a proportion of total costs.

Question #82 of 120 Question ID: 1207700

The type of share voting most likely to result in significant minority shareholders having an approximately proportional representation on
the board of directors is:

A) statutory voting.
B) weighted voting.
C) cumulative voting.

Question #83 of 120 Question ID: 1207697

Which of the following indexes is most likely to be rebalanced on a regular basis?

A) Price-weighted index.
B) Equal-weighted index.
C) Market-capitalization weighted index.

Question #84 of 120 Question ID: 1207703

Over the most recent period, Ladden Materials has seen slow growth, increased competition, and declining profitability in its industry.
The phase of the industry life cycle for Ladden's industry is most likely:

A) mature.
B) decline.
C) shakeout.

Question #85 of 120 Question ID: 1207698

Mike Bowers observes that during one year the return on the S&P 500 index is 20%. Recalculating the return on an equally weighted
basis, Bowers estimates that the index return is 15%. The difference in the two calculations of return is best explained by:

A) large capitalization stocks outperforming small capitalization stocks.

B) small capitalization stocks outperforming large capitalization stocks.

C) dividends on the stocks in the index.

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Question #86 of 120 Question ID: 1207696

Which of the following is most accurate regarding the relationship between operational efficiency and informational efficiency?

A) Operational efficiency contributes to informational efficiency.

B) Informational efficiency is independent of operational efficiency.
C) There is a trade-off between operational efficiency and informational efficiency.

Question #87 of 120 Question ID: 1207714

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

Compared to a bond's Macaulay duration, its modified duration:

A) is lower.
B) is higher.
C) may be lower or higher.

Question #88 of 120 Question ID: 1207711

An analyst obtains a market quote for the two-year forward rate two years from now. To derive the next point on a theoretical annual
forward rate curve, the analyst can use:

A) the two-year and five-year spot rates.

B) the three-year and four-year spot rates.
C) the three-year and five-year spot rates.

Question #89 of 120 Question ID: 1207719

The credit rating agency practice of "notching" is best described as:

A) assigning different ratings to different debt issues from the same issuer.
B) downgrading or upgrading the rating of a debt issue or issuer by one increment.
C) adding a plus or minus sign to a rating to indicate a positive or negative outlook.

Question #90 of 120 Question ID: 1207717

A bond priced at par ($1,000) has a modified duration of 8 and a convexity of 100. If interest rates fall 50 basis points, the new price will
be closest to:
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A) $1,041.25.
B) $958.75.
C) $875.00.

Question #91 of 120 Question ID: 1207710

An analyst needs to estimate the value of an illiquid 7% BB+ rated bond that has eight years to maturity. Using matrix pricing, the
analyst should most appropriately base an estimate for this bond on yields of:

A) on-the-run eight-year government bonds.

B) more frequently traded bonds rated BB+.

C) other BB+ rated bonds with similar liquidity to this bond.

Question #92 of 120 Question ID: 1207720

Acme Holdings operates in an industry for which three-year average financial ratios by credit rating are as follows:

Ratio AAA AA A BBB BB B CCC

FCF/debt 32.0% 25.9% 21.8% 18.7% 12.3% 7.0% 3.1%

Debt/EBITDA 0.9× 1.3× 1.5× 1.9× 2.3× 3.5× 5.0×

If Acme has a three-year average debt-to-EBITDA ratio of 2.4 and a free cash flow to debt ratio of 7.1, its credit rating is most likely to
be:

A) investment grade.
B) below investment grade.

C) borderline investment grade.

Question #93 of 120 Question ID: 1207713

Commercial mortgage-backed securities (CMBS) loans typically have greater call protection than agency MBS loans because:

A) commercial mortgages may have yield maintenance charges.

B) smaller-sized mortgages typically are not refinanced if interest rates fall.
C) CMBS typically receive higher credit ratings from credit agencies than residential MBS.

Question #94 of 120 Question ID: 1207709

A non-amortizing fixed income security is most accurately described as:

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A) a bullet bond.
B) a balloon bond.
C) a mortgage bond.

Question #95 of 120 Question ID: 1207708

For a domestic investor purchasing bonds in a foreign market and currency:

A) appreciation of both the asset and the foreign currency benefits the domestic investor.
B) depreciation of both the asset and the foreign currency benefits the domestic investor.

C) appreciation of the asset and depreciation of the foreign currency benefit the domestic
investor.

Question #96 of 120 Question ID: 1207715

Reinvestment risk is least likely:

A) minimized with zero-coupon bond issues.

B) more problematic for those investors with longer time horizons.
C) more problematic when the current coupons being reinvested are relatively small.

Question #97 of 120 Question ID: 1207718

A duration gap is most accurately described as a difference between a bond's:

A) Macaulay duration and effective duration.

B) duration and the bondholder’s investment horizon.
C) actual change in value and the change estimated using duration and convexity.

Question #98 of 120 Question ID: 1207716

Siegel, Inc., has issued bonds maturing in 15 years but callable at any time after the first 8 years. The bonds have a coupon rate of 6%,
and are currently trading at $992 per $1,000 par value. If interest rates decline over the next few years:

A) the call option embedded in the bonds will increase in value, but the price of the bond will
decrease.
B) the price of the bond will increase, but likely by less than a comparable bond with no
embedded option.
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C) the price of the bond will increase, primarily as a result of the increasing value of the call
option.

Question #99 of 120 Question ID: 1207712

Jefferson Blake, CFA, believes there is a good opportunity to purchase an option-free 4% annual pay bond with three years left until
maturity, a zero-volatility spread of 40 basis points, and a par value of $1,000. Blake observes that 1-year, 2-year, and 3-year
government bond spot rates are currently 4.0%, 4.5%, and 4.75%, respectively. The maximum price Blake should be willing to pay for
the bond is closest to:

A) $940.
B) $970.
C) $980.

Question #100 of 120 Question ID: 1207725

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

Which of the following is most likely to increase the price of a forward contract on an asset?

A) Higher dividends from a stock.

B) Lower storage costs for a commodity.
C) Lower convenience yield for a commodity.

Question #101 of 120 Question ID: 1207723

A call option on a $25 stock with an exercise price of $30 sells for a premium of $4. At expiration, the writer of the call will experience a
net loss on the option if the stock price is greater than:

A) $26.
B) $29.
C) $34.

Question #102 of 120 Question ID: 1207727

A bank borrows for 360 days and simultaneously lends the proceeds for 90 days. This transaction creates a synthetic forward rate
agreement (FRA) closest to:

A) a long position in a 90-day FRA on 270-day LIBOR.

B) a long position in a 90-day FRA on 360-day LIBOR.
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C) a short position in a 360-day FRA on 90-day LIBOR.

Question #103 of 120 Question ID: 1207728

An American-style call option is most likely to be more valuable than an otherwise equivalent European-style call option if:

A) the call is deep in the money.

B) its underlying asset is a semiannual-pay bond.
C) implied volatility increases during the life of the call.

Question #104 of 120 Question ID: 1207722

Which of the following statements about futures and forwards is most accurate? Futures:

A) are subject to default risk, but forwards are not.

B) are individualized contracts, but forwards are standardized.
C) require that traders post margin in order to trade, but forwards typically require no cash
transaction until the delivery date.

Question #105 of 120 Question ID: 1207724

Derivatives markets are most likely to:

A) reduce transactions costs.

B) increase speculation and risk.
C) provide arbitrage opportunities to investors.

Question #106 of 120 Question ID: 1207726

Derivatives pricing is based on the assumption that:

A) no arbitrage occurs.
B) the law of one price holds.
C) long and short investors are net risk-neutral.

Question #107 of 120 Question ID: 1207732

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

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A commodities market is typically in backwardation if:

A) speculators are the primary drivers of futures prices.

B) users of a commodity are the primary drivers of futures prices.
C) producers of a commodity are the primary drivers of futures prices.

Question #108 of 120 Question ID: 1207729

To exit an investment in a portfolio company through a trade sale, a private equity firm sells:

A) shares of a portfolio company to the public.

B) the portfolio company to another private equity firm.
C) the portfolio company to one of the portfolio company’s competitors.

Question #109 of 120 Question ID: 1207733

Which of the following is least likely a benefit of fund of funds (FOF) investing?

A) FOFs may permit access to otherwise unavailable hedge funds.

B) FOFs allow investors to diversify the risks of holding a single hedge fund.
C) The fee is generally quite reasonable since the investor only pays the manager of the FOF.

Question #110 of 120 Question ID: 1207730

A private equity firm that provides equity capital to a publicly traded company to finance the company's restructuring, but does not take
the company private, is best described as engaging in:

A) angel investing.

B) mezzanine financing.
C) private investment in public equity.

Question #111 of 120 Question ID: 1207734

Which provision of a hedge fund's incentive fees is designed to prevent investors from paying multiple incentive fees for the same
performance?

A) Hurdle rate.
B) High water mark.
C) 2-and-20 structure.
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Question #112 of 120 Question ID: 1207731

Which of the following is most likely to represent the management fees of a private equity fund?

A) 2% of invested capital.
B) 3% of committed capital.
C) 1% of drawn-down capital.

Question #113 of 120 Question ID: 1207735

A hedge fund's lockup period is the time during which:

A) the fund is closed to new investors.

B) an investor may not redeem shares in the fund.
C) the fund must return cash to an investor who has requested a redemption.

Question #114 of 120 Question ID: 1207736

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

Which of the following portfolios will have the lowest diversification ratio? A portfolio of:

A) 30 equally-weighted stocks with companies from the same industry.

B) 20 equally-weighted stocks with companies from different industries.

C) 30 equally-weighted stocks with companies from different industries.

Question #115 of 120 Question ID: 1207741

In a case where a client's capacity to bear risk is significantly less than the client's expressed willingness to bear risk, the most
appropriate action for a financial advisor is to:

A) counsel the client and attempt to change his attitude towards risk.
B) base the assessment of risk tolerance in the IPS on client’s ability to bear risk.
C) attempt to educate the client about investment risk and correct any misconceptions.

Question #116 of 120 Question ID: 1207740

Which of the following statements about risk is most accurate?

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A) The capital market line plots expected return against market risk.
B) The efficient frontier plots expected return against unsystematic risk.
C) The security market line plots expected return against systematic risk.

Question #117 of 120 Question ID: 1207739

A portfolio manager is constructing a new equity portfolio consisting of a large number of randomly chosen domestic stocks. As the
number of stocks in the portfolio increases, what happens to the expected levels of systematic and unsystematic risk?

Systematic risk Unsystematic risk

A) Increases Remains the same

B) Decreases Increases

C) Remains the same Decreases

Question #118 of 120 Question ID: 1207742

The type of technical analysis chart most likely to be useful for intermarket analysis is a:

A) candlestick chart.
B) point-and-figure chart.
C) relative strength chart.

Question #119 of 120 Question ID: 1207738

Rolly Parker, CFA, has managed the retirement account funds for Misto Inc. for the last two years. Contributions and withdrawals from
the account are decided by Misto's CFO. The account history is as follows, with account values calculated before same-date deposits
and withdrawals:

Jan 1, 20X1 Beginning portfolio value $10 million

Jul 1, 20X1 Account value $11.2 million

Jul 1, 20X1 Deposit of cash $1.2 million

Jan 1, 20X2 Account value $12.5 million

Jan 1, 20X2 Withdrawal of cash $0.6 million

Dec 31, 20X2 Account value $15 million

The appropriate annual return to use in evaluating the manager's performance is closest to:

A) 9%.
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B) 19%.
C) 22%.

Question #120 of 120 Question ID: 1207737

Which of the following pooled investment shares is least likely to trade at a price different from its NAV?

A) Exchange-traded fund shares.

B) Open-end mutual fund shares.
C) Closed-end mutual fund shares.