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Mock Exam 4

The document contains 14 multiple choice questions related to ethical standards and conduct for CFA charterholders according to the CFA Institute Code of Ethics and Standards of Professional Conduct. The questions cover topics such as handling confidential information, conflicts of interest, reasonable basis for recommendations, and disclosure requirements.

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0% found this document useful (0 votes)
277 views62 pages

Mock Exam 4

The document contains 14 multiple choice questions related to ethical standards and conduct for CFA charterholders according to the CFA Institute Code of Ethics and Standards of Professional Conduct. The questions cover topics such as handling confidential information, conflicts of interest, reasonable basis for recommendations, and disclosure requirements.

Uploaded by

pagis31861
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Question #1 of 180 Question ID: 1420390

Which of the following statements about ethical behavior is most accurate?

A) Legal standards typically set a higher standard of behavior than ethical standards.
Personal traits are the most important determinant of the ethical quality of one’s
B)
behavior.
Unethical behavior in the investment industry increases the cost of capital for
C)
businesses.

Question #2 of 180 Question ID: 1420400

While at dinner a member overhears a well-known and influential analyst from a


different firm tell his companion that he will be raising his recommendation on Tree
Products from hold to buy when he appears on a morning talk show the next day.
Before the broadcast, the member buys 1,000 shares of Tree Products for her own
account. The member has violated the Standard relating to:

A) fair dealing.
B) diligence and reasonable basis.
C) material nonpublic information.

Question #3 of 180 Question ID: 1420394

Allen Winkler, CFA, recently had lunch with Kim Thompson, a former professor of his,
who told him of a new valuation model she had developed. Winkler recreated
Thompson's model with some revisions and back-tested it using data provided by
Standard & Poor's (S&P) with impressive results. Winkler's firm launches a mutual
fund based on the revised model, and Winkler provides a discussion of the principles
underlying the model and the test results. Is Winkler required to credit Thompson for
having developed the model and S&P as the source of the data?

A) Both of these sources must be cited.


B) Neither of these sources must be cited.
C) Only one of these sources must be cited.

Question #4 of 180 Question ID: 1420411

Donald Smith, CFA, has been assigned by his employer to write a report for clients on
Braden Corporation. Smith has 1,000 shares of Braden that he bought three years ago
and has been discussing a consulting contract with Braden to write guidelines for
their investor relations department. If Smith writes the report on Braden Corporation,
he must disclose within the report:

A) both his ownership of Braden shares and his prospective consulting work.
and to his employer his prospective consulting work but not his ownership of
B)
Braden shares.
his ownership of Braden shares but need only disclose his prospective consulting
C)
work to his employer.

Question #5 of 180 Question ID: 1420404

Diane Harris, a CFA Institute member, is a portfolio manager for Worldwide


Investments. One of her clients has offered her the use of his condominium in Hawaii
if the returns on his U.S. equities account beat their benchmark on a risk-adjusted
basis. Harris informed her manager of all terms of this agreement in writing and
received verbal consent to the arrangement before accepting the offer. Did Harris
violate the Standards?

A) Yes, because written consent from her employer is required.


No, because bonuses from clients for doing her job well do not create a conflict of
B)
interest.
No, because Harris notified and received verbal consent from her employer to enter
C)
the arrangement.

Question #6 of 180 Q i 420408


Question #6 of 180 Question ID: 1420408

Betty Cantor, CFA, has been finishing a report on high-tech firm HLC Corporation and
intends to give it a "market perform" rating. Before releasing the report, she speaks
with Donald Watson, her former manager and mentor, who is now with another
investment firm and is well known for his great calls on high-tech companies. Watson
is bullish on HLC and tells Cantor that "HLC is going to increase for sure over the next
year, and we have it as a buy." Cantor changes her rating on HLC to "outperform"
based on Watson's comments. Cantor has:

A) not violated the Standards because she knows the high quality of Watson’s analysis.
violated the Standards because she based her rating on material nonpublic
B)
information.
violated the Standards because she does not have a reasonable basis for her
C)
recommendation.

Question #7 of 180 Question ID: 1420409

Tom Hayes, CFA, changed firms recently, becoming the senior analyst at Balcom
Management. He had earned a great reputation at his old firm with his analysis of
Selldex, which doubled in value after his recommendation. Because he still likes
Selldex, Hayes recreates from public sources the records and analysis he did at his
previous employer and issues a report on Selldex with a "buy" rating. Hayes has:

A) not violated the Standards.


violated the Standards because the analysis he did for his previous employer
B)
belongs to his previous employer.
violated the Standards because his analysis is based on previous research and not
C)
independent of his prior analysis.

Question #8 of 180 Question ID: 1420415

The CFA Institute Code of Ethics most likely requires members and candidates to:

A) not engage in activity which compromises the integrity of CFA Institute.


stay informed on applicable laws and regulations that pertain to their respective
B)
areas of business.
act with competence, integrity, and in ethical manner when dealing with the public,
C)
clients, employers, employees, and other market participants.

Question #9 of 180 Question ID: 1420405

Craig Boone, CFA, a fixed-income trader, observes that one of the salesmen on the
desk has been allocating his trades at the end of the day, giving better execution to
large clients, a practice Boone suspects is illegal. The salesman tells Boone this is a
common practice and that the firm's senior management is aware of it. If Boone
makes a personal record of the activity, takes it home for his personal files, and
subsequently reveals it to regulatory authorities, he would:

A) not be in violation of any Standards.


B) be in violation of the Standards for disclosing confidential information.
C) be in violation of the Standards for breaching his duty of loyalty to his employer.

Question #10 of 180 Question ID: 1420391

Sanctions that may be imposed on members by CFA Institute include:

A) public censure, suspension of membership, and fines.


B) suspension of membership, revocation of CFA charter, and fines.
C) public censure, suspension of membership, and revocation of CFA charter.

Question #11 of 180 Question ID: 1420412

Mary Walters, CFA, is a bank trust officer who has entered into a referral agreement
with Bob Sear, a tax attorney. Sear has told Walters that he will do her tax work in
return for referrals. According to the CFA Institute Code and Standards, Walters must
disclose:
only the fact that she compensated for referrals, to any clients or prospects she
A)
refers to Sear.
only the fact that she is compensated for referrals, to her employer and any clients
B)
or prospects she refers to Sear.
the fact that she is compensated for the referrals and the nature of the
C) compensation she is to receive, to her employer and any clients or prospects she
refers to Sear.

Question #12 of 180 Question ID: 1420396

Ronaldo Jenkins, CFA, chief investment officer for Windwatch Advisors, has been
helping his local municipality find an investment bank for a bond issue. Jenkins was
told in confidence that one investment bank, which is a subsidiary of a commercial
bank held in Windwatch client portfolios, is experiencing financial difficulties and will
be shut down soon. According to the CFA Institute Standards of Professional Conduct,
Jenkins is least likely permitted to:

share the information received about the investment bank with his compliance
A)
officer.
share the information received about the investment bank with Windwatch’s head
B)
of equity investments.
approach the investment bank about making public disclosure of the financial
C)
difficulties and pending closure.

Question #13 of 180 Question ID: 1420401

Morton Crane, CFA, is a portfolio manager. Crane has just been informed by his
compliance officer that a new law will require additional disclosures of personal client
information to regulators for two of Crane's former clients and one of his current
clients. Crane decides to comply with the new law and provide the required client
information. Has Crane violated CFA Institute Standards of Professional Conduct?

A) No.
B) Yes, because he disclosed confidential information about a former client.
C) Yes, because he disclosed confidential information about a current client.

Question #14 of 180 Question ID: 1420397

While visiting Cassori Company, Mark Ramsey, CFA, overhears management make
comments that are not public information but are not really meaningful by
themselves. Combining this information with his own analysis and other outside
sources, Ramsey decides to change his recommendation on Cassori from "Buy" to
"Sell." According to the CFA Institute Standards of Professional Conduct, Ramsey:

A) must not issue his report until Cassori’s management makes their comments public.
may issue his “Sell” report because the facts are nonmaterial, but should maintain a
B)
file of the facts and documents leading to this conclusion.
must report these events to his immediate supervisor and legal counsel, since they
C)
have become material in combination with his analysis.

Question #15 of 180 Question ID: 1420418

When a member or candidate knows that a client and coworker are violating
regulatory rules and local law, the member or candidate is:

A) not required to report any of the violations to authorities.


B) required to report violations by the coworker but not the client.
required to report the violations of the law and of the regulatory rules to the
C)
appropriate authority.

Question #16 of 180 Question ID: 1420398


Adam Schute, CFA, is on a conference call with the CFO of an investment banking
client with his phone speaker on and his door open. As a result, salesmen and traders
overhear the CFO describing problems with production target dates that have not
been publicly disclosed. The salesmen relay this information to clients and the traders
reduce their positions in the stock. With respect to the Standard on material
nonpublic information, Schute has:

not violated the Standard because he has not acted on the information, but the
A)
traders and salesmen have violated the Standard.
violated the Standard because he should have taken steps to prevent the
B)
dissemination of the information.
violated the Standard by not making the information public when he realized others
C)
had overheard the call.

Question #17 of 180 Question ID: 1420416

Peter Wellington has changed his status in marketing materials to "Level III CFA
candidate." Wellington passed the Level II CFA exam and just received his results. He
intends to register for the next Level III CFA examination that is offered the following
June. Wellington has:

A) not violated the Standards of Professional Conduct.


B) violated the Standard on conduct as participants in CFA Institute programs.
violated the Standard on reference to the CFA Institute, the CFA Designation, and
C)
the CFA Program.

Question #18 of 180 Question ID: 1420406

When he assumed the job of compliance officer two years ago, Ed Michaels, CFA,
issued written compliance procedures and made all covered employees aware of the
procedures. A report by an external auditor found that on several occasions over the
past two years, two different employees traded in recommended securities ahead of
trades made in managed client accounts. Michaels fires both employees and
recirculates the written compliance procedures that explain clearly which activities are
prohibited. Michaels has violated the Standard concerning:
Responsibilities of Supervisors by firing the employees instead of restricting their
A)
activities.
Responsibilities of Supervisors by failing to implement reasonable procedures to
B)
detect violations.
Misconduct because, as the compliance officer, he is associated with, and ultimately
C)
responsible for, the unethical activity.

Question #19 of 180 Question ID: 1420413

Ralph Malone, CFA, has many clients, including a trust account that benefits three of
his immediate family members. His firm changes its recommendation on a stock from
"hold" to "buy" on a security that is suitable for many clients, including the trust.
Which of the following would be considered a violation of the Standard concerning
priority of transactions?

Malone waits until after the firm purchases the security to buy it for the family trust
A)
account.
Malone trades on the family account shortly after his firm’s clients have been
B)
informed of the buy recommendation.
The firm gives clients time to act on the new recommendation and then buys
C) 100,000 shares for its own account prior to publicly disclosing the new
recommendation.

Question #20 of 180 Question ID: 1420407

Patricia Nelson, CFA, is informed by one of her clients that if she can get the
performance of the client firm's pension portfolio above that of the Standard & Poor's
average by year-end, the client will give her a free trip to Singapore to visit the firm's
offices. If Nelson agrees to this arrangement, which of the following actions complies
with CFA Institute Standards of Professional Conduct? Nelson:

A) must inform her employer of this agreement but does not need consent.
B) must inform her employer of this agreement and may accept it with verbal consent.
may inform her employer by email of this agreement and must receive written
C)
consent.

Question #21 of 180 Question ID: 1420410

John Anderson, CFA, follows Radley Manufacturing for his employer, Atlas Brokers.
Radley has announced a takeover bid for Palmer Industries, a company that Atlas
does not follow. To get out a research note about the potential effects of the
acquisition on Radley, Anderson purchases a report on Palmer from a research firm
Atlas regularly uses. Anderson incorporates projections and analysis from the
purchased report into his research note on what a post-acquisition Radley would look
like but does not cite the source. Anderson has violated the Standard on:

A) misrepresentation.
B) independence and objectivity.
C) diligence and reasonable basis.

Question #22 of 180 Question ID: 1420414

Susan Smart, CFA, is about to change her "buy" recommendation on RollinsCo to


"sell." RollinsCo had been growing rapidly over the past year, but Smart believes the
growth potential is now gone. Smart sells the shares held in her discretionary client
accounts and in her own personal account before issuing her report. According to the
Standards that concern fair dealing and priority of transactions, Smart violated:

A) both of these Standards.


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

Question #23 of 180 Question ID: 1420399


Matt Jacobs, CFA, recommended to a client that he buy shares in Timeco, which has
subsequently underperformed the market. Timeco stock is thinly traded, and its price
has decreased sharply over the past few weeks because two insiders have sold large
blocks of shares. Jacobs believes this price decrease reflects an illiquid market.
Because he still believes Timeco is a good long-term investment, he buys shares for
his personal account in order to raise the price and help him convince his client to
hold on to his investment in Timeco. Has Jacobs violated the Standards?

A) No, because the trade is for the benefit of his client.


B) Yes, because he intended to manipulate the market price of Timeco.
No, because he is providing liquidity to offset the effects of the recent large insider
C)
sales.

Question #24 of 180 Question ID: 1420417

To be compliant with GIPS, a firm's composites must comprise all:

A) fee-paying accounts.
B) discretionary accounts.
C) discretionary accounts that are fee-paying.

Question #25 of 180 Question ID: 1420393

Tony Roberts, CFA, is part of a team that manages equities accounts. He believes that
a teammate, who is not a CFA Institute member or candidate, takes actions that, while
not illegal under local law, violate CFA Institute Standards of Professional Conduct.
According to the CFA Institute Standards of Professional Conduct, Roberts:

A) is required to dissociate from the team’s activities if they continue.


is not required to act because the Code and Standards do not apply to non-
B)
members.
must report the suspected violations of the Code and Standards first to his
C)
supervisor and then to CFA Institute.
Question #26 of 180 Question ID: 1420395

Judy Blush is a CFA candidate and is recommending the purchase of a mutual fund
that invests solely in long-term U.S. Treasury bonds (T-bonds) to one of her clients.
She states: "Because the U.S. government guarantees payment of both principal and
interest on its bonds, risk of loss from investing in this fund is virtually zero." Blush's
actions violated:

A) the Standard on misrepresentation.


B) the Standard on communication with clients.
C) none of the Standards of Professional Conduct.

Question #27 of 180 Question ID: 1420392

The Code of Ethics least likely states that members and candidates are required to:

A) use their own judgement.


B) obey all laws and the Standards of Practice.
C) attempt to improve the competence of other investment professionals.

Question #28 of 180 Question ID: 1420402

According to the Standard concerning suitability, it is most likely that members and
candidates in advisory relationships with clients should:

A) document unsuccessful attempts to update client information.


purchase only securities with low to medium risk for a client with moderate risk
B)
tolerance.
decline to manage assets for clients who withhold important information about
C)
their financial circumstances and needs.

Question #29 of 180 Question ID: 1420419


Which of the following statements is a proper reference to the CFA® designation?

A) I expect to obtain the CFA designation after I pass the next Level III exam.
B) As a CFA charterholder, I am required to comply with high ethical standards.
As a CFA Level II, I hope to obtain the highest set of credentials in the investment
C)
industry.

Question #30 of 180 Question ID: 1420403

Byron Bell, CFA, tells his assistant that Mary Mitchel, a client of his, confided to him
that she is suffering from the early stages of Alzheimer's disease and that she is
planning to leave almost all of her sizable estate to Prather House, a support facility
for Alzheimer's patients. Bell directs his assistant to keep this information
confidential. With respect to the Standard on preservation of confidentiality, Bell has:

A) not violated the Standard.


violated the Standard by sharing information about his client’s health but not about
B)
planned bequest to Prather House.
violated the Standard both by sharing the information about his client’s health and
C)
about her planned bequest to Prather House.

Question #31 of 180 Question ID: 1420256

The slope coefficient of a lin-log model describes a linear relationship between:

relative changes in the dependent variable and relative changes in the independent
A)
variable.
relative changes in the dependent variable and absolute changes in the
B)
independent variable.
absolute changes in the dependent variable and relative changes in the
C)
independent variable.

Question #32 of 180 Q ti ID 1420276


Question #32 of 180 Question ID: 1420276

In accrual accounting, the matching principle states that:

an entity should recognize revenues only when received and expenses only when
A)
they are paid.
transactions and events producing cash flows are allocated only to time periods in
B)
which the cash flows occur.
expenses incurred to generate revenue are recognized in the same time period as
C)
the revenue.

Question #33 of 180 Question ID: 1420281

Listed equity securities held as assets that do not convey significant influence in the
investee company must be reported at fair value through profit and loss under:

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

Question #34 of 180 Question ID: 1420261

Which of the following statements about methods of calculating gross domestic


product is most accurate?

Except for a statistical discrepancy, the income and expenditure approaches to


A)
calculating GDP should result in the same value for economic output.
Because it includes activity at all stages of production, the sum-of-value-added
B)
method results in a better estimate of GDP than the value-of-final-output method.
Value-of-final-output is used to calculate GDP under the expenditure approach,
C)
while sum-of-value-added is used to calculate GDP under the income approach.

Question #35 of 180 Question ID: 1420244


Given the observations 45, 20, 30, and 25, the mean absolute deviation is closest to:

A) 0.0.
B) 7.5.
C) 13.3.

Question #36 of 180 Question ID: 1420275

The independent auditors of Shadydells, Inc., have determined that the company
recorded operating leases that should have been capitalized. This is considered to be
a material instance of noncompliance with applicable GAAP, but the financial
statements are otherwise fairly presented. Which opinion are the auditors most likely
to issue?

A) Adverse opinion.
B) Qualified opinion.
C) Unqualified opinion.

Question #37 of 180 Question ID: 1420284


An analyst gathers the following information:

Net income $100


Decreased in accounts receivable 30
Depreciation 25
Increase in inventory 17
Increase in accounts payable 10
Decrease in wages payable 5
Increase in deferred taxes 17
Sale of fixed assets 150
Purchase of fixed assets 340
Profit from sale of fixed assets 5
Dividends paid out 35
Sale of new common stock 120

Based on the above information, the company's cash flow from operations under U.S.
GAAP is:

A) $155.
B) $165.
C) $182.

Question #38 of 180 Question ID: 1420274

The J-curve, in the context of trade between two countries, refers to the fact that
when the domestic country has a trade deficit:

appreciation of the domestic currency initially leads to a decrease in the trade deficit
A)
but will increase the trade deficit in the long term.
an increase in domestic inflation will initially increase the trade deficit but will
B)
decrease the trade deficit in the long term.
appreciation of the foreign currency will initially increase the trade deficit but will
C)
decrease the trade deficit in the long term.
Question #39 of 180 Question ID: 1420271

Which of the following organizations is the most focused on promoting economic


growth and reducing poverty by offering both monetary and technical assistance?

A) World Bank.
B) World Trade Organization.
C) International Monetary Fund.

Question #40 of 180 Question ID: 1420266

The quantity theory of money states that in a full employment economy, any increase
in the supply of money in excess of the rate of growth of real GDP will lead to a
proportional increase in:

A) the price level.


B) velocity.
C) real GDP.

Question #41 of 180 Question ID: 1420248

An investor wants to buy a condominium in Florida. The value of her portfolio is


currently $1,000,000, and she needs $100,000 in one year for the down payment. She
doesn't mind decreasing her capital as long she has $950,000 remaining in her
portfolio after the down payment is made. She is considering three new portfolios for
her holdings. The details on the three portfolios are:

Expected Annual Return Standard Deviation of Returns


Portfolio 1 17% 15%
Portfolio 2 12% 10%
Portfolio 3 8% 6%

According to Roy's Safety-First criterion, the portfolio she would prefer is:

A) Portfolio 1.
B) Portfolio 2.
C) Portfolio 3.

Question #42 of 180 Question ID: 1420296

A lessor will recognize a lease receivable asset if the lease is classified as:

A) an operating lease.
B) a finance lease.
C) either an operating or a finance lease.

Question #43 of 180 Question ID: 1420242

An investor would like to purchase a 20-year annuity that will pay $45,000 each year
beginning when she retires 15 years from now. The amount she would need to invest
today to fund this annuity, assuming an annual return of 5%, in order fund this
annuity, is closest to:

A) $269,750.
B) $274,340.
C) $283,240.

Question #44 of 180 Question ID: 1420250

Adam Farman has been asked to estimate the volatility of a technology stock index.
He has identified a statistic which has an expected value equal to the population
volatility and has determined that increasing his sample size will decrease the
sampling error for this statistic. Based only on these properties, his statistic can best
be described as:

A) unbiased and efficient.


B) unbiased and consistent.
C) efficient and consistent.

Question #45 of 180 Question ID: 1420257

A plant manager observes the following relationship between hours of labor and units
of output:

Labor hours Units of output


1,400 140,000
1,500 150,000
1,600 165,000
1,700 175,000
1,800 180,000
1,900 170,000

At what quantity of labor hours does this plant first experience diminishing marginal
returns to labor?

A) Between 1,400 and 1,500 hours.


B) Between 1,600 and 1,700 hours.
C) Between 1,800 and 1,900 hours.

Question #46 of 180 Question ID: 1420279

Which of the following types of items are least likely included in other comprehensive
income?

A) Losses under the revaluation model.


B) Unrealized gains on equity securities.
C) Realized gains on securities classified as available-for-sale.

Question #47 of 180 Question ID: 1420252


Q

A researcher has investigated the returns over the last five years to a long-short
strategy based on mean reversion in equity returns volatility. His hypothesis test led
to rejection of the hypothesis that abnormal (risk-adjusted) returns to the strategy
over the period were less than or equal to zero at the 1% level of significance. He
would most appropriately decide that:

his firm should employ the strategy for client accounts because the abnormal
A)
returns are positive and statistically significant.
while the abnormal returns are highly significant statistically, they may not be
B)
economically meaningful.
as long as the estimated statistical returns are greater than the transactions costs of
C)
the strategy, his firm should employ the strategy for client accounts.

Question #48 of 180 Question ID: 1420475

During a period when net income is unexpectedly weak, managers who attempt to
smooth earnings are most likely to:

A) capitalize an expense.
B) decrease the estimated lives of assets.
C) classify a nonrecurring gain as recurring income.

Question #49 of 180 Question ID: 1420299

Which of the following pairs of general categories are least likely to be considered in
the formulas used by credit rating agencies to determine the capacity of a borrower
to repay a debt?

A) Operational efficiency; leverage.


B) Margin stability; availability of collateral.
C) Leverage; scale and diversification.
Question #50 of 180 Question ID: 1420267

Under what conditions is inflation most likely to shift wealth from lenders to
borrowers?

A) Only when inflation is unexpected.


B) Only when inflation is unexpected and negative.
C) When inflation is either unexpected or expected.

Question #51 of 180 Question ID: 1420502

A monopolist is most likely to:

A) maximize the average profit per unit sold.


B) charge the highest price for which it can sell its product.
C) produce where marginal revenue equals marginal cost.

Question #52 of 180 Question ID: 1420292

Which of the following definitions used in accounting for income taxes is least
accurate?

Income tax expense is current period taxes payable adjusted for any changes in
A)
deferred tax assets and liabilities.
A valuation allowance is a reserve against deferred tax assets based on the
B)
likelihood that those assets will not be realized.
A deferred tax liability is created when tax expense is less than taxes payable and
C)
the difference is expected to reverse in future years.

Question #53 of 180 Question ID: 1420245


The following table summarizes the results of a poll taken of CEOs and analysts about
the economic impact of a pending piece of legislation:

Group Number of Respondents who Number of Respondents who


Predict Positive Impact Predict Negative Impact
CEOs 40 30
Analysts 70 60

What is the probability that a randomly selected individual from this group will be
either an analyst or someone who thinks this legislation will have a positive impact on
the economy?

A) 0.75.
B) 0.80.
C) 0.85.

Question #54 of 180 Question ID: 1420272

Which of the following objectives would a national government most likely pursue by
placing restrictions on inflows of foreign capital?

A) Protecting domestic industries.


B) Supporting domestic asset prices.
C) Keeping domestic interest rates low.

Question #55 of 180 Question ID: 1420294

Under U.S. GAAP, which of the following statements about the financial statement
effects of issuing bonds is least accurate?

A) Issuance of debt has no effect on cash flow from operations.


Periodic interest payments decrease cash flow from operations by the amount of
B)
interest paid.
Payment of debt at maturity decreases cash flow from operations by the face value
C)
of the debt.
Question #56 of 180 Question ID: 1420293

When an increase in the tax rate is enacted, deferred tax:

A) assets and liabilities both increase in value.


B) assets decrease in value and deferred tax liabilities increase in value.
C) liability and asset accounts are maintained at historical tax rates until they reverse.

Question #57 of 180 Question ID: 1420255

Which of the following tests would generally be considered a nonparametric test?

A) Test of whether a sample is random.


B) Large sample test of the value of a population mean.
C) Value of the variance of a normal population.

Question #58 of 180 Question ID: 1420289

In periods of rising prices and stable or increasing inventory quantities, compared


with companies that use LIFO inventory accounting, companies that use the FIFO
method will have:

A) higher COGS and lower taxes.


B) higher net income and higher taxes.
C) lower inventory balances and lower working capital.

Question #59 of 180 Question ID: 1420262

Long-run aggregate supply is least likely to be affected by changes in the:

A) prices of raw materials inputs.


B) quantity of labor in the economy.
C) level of technology.

Question #60 of 180 Question ID: 1420290

Which of the following accounting practices is most likely to decrease reported


earnings in the current period?

A) Using the straight-line method of depreciation instead of an accelerated method.


B) Capitalizing advertising expenses rather than expensing them in the current period.
C) Using LIFO inventory cost methods during a period of rising prices.

Question #61 of 180 Question ID: 1420241

A client plans to retire in 15 years and will need to withdraw $50,000 from his
retirement account each year for 10 years, beginning on the day he retires. After that,
he will need to withdraw $20,000 per year for 25 years. The account returns 4%
annually. The amount he needs to have in the account on the day he retires is closest
to:

A) $580,000.
B) $640,000.
C) $655,000.

Question #62 of 180 Question ID: 1420268

If investors' expected future incomes increase and the demand for financial capital
increases, other things equal:

A) the equilibrium interest rate will rise.


B) the equilibrium interest rate will fall.
C) these two factors will have opposing effects on the equilibrium interest rate.
Question #63 of 180 Question ID: 1420285

Selected year-end values for Able, Inc., are presented in the following tables:

Balance Sheet Items December 31, 20X2 December 31, 20X1


Accounts receivable $19 million $21 million
Trade payables $14 million $16 million
Inventory $31 million $28 million
Income Statement Items December 31, 20X2
Net income $42 million
Loss on sale $3 million
Depreciation $2 million
Dividends paid $1 million

Based only on the data in the tables, 20X2 cash flow for operations for Able, Inc., is:

A) $43 million.
B) $44 million.
C) $45 million.

Question #64 of 180 Question ID: 1420280

Which of the following items affects owners' equity but is not included as a
component of net income?

A) Depreciation.
B) Dividends received on shares of another company classified as available for sale.
C) Foreign currency translation gains and losses.

Question #65 of 180 Question ID: 1420288


Gordon, Inc., reports using the LIFO cost method. In notes to its financial statements,
Gordon discloses inventory of 500 units in 20X1 and 510 units in 20X2 and states a
LIFO reserve of $50,000 in 20X1 and $48,000 in 20X2. These inventory disclosures
most likely reflect:

A) decreasing demand.
B) decreasing prices.
C) a LIFO liquidation.

Question #66 of 180 Question ID: 1420251

Excerpts from statistical tables:

Student's t-Distribution

Level of Significance for Two-Tailed Test


df 0.10 0.05 0.01
27 1.703 2.052 2.771
28 1.701 2.048 2.763
29 1.699 2.045 2.756

Cumulative z-Table

z 0.07 0.08 0.09


1.2 0.8980 0.8997 0.9015
1.3 0.9147 0.9162 0.9177
1.4 0.9292 0.9306 0.9319

An analyst has a sample of 28 observations of the weekly return of an index portfolio


that includes 50 stocks. The weekly returns are approximately normally distributed,
and the sample mean and sample variance are 1.2% and 0.00175. A 90% confidence
interval for a weekly return is closest to:

A) 0.19% to 2.21%.
B) –0.15% to 2.55%.
C) –5.92% to 8.32%.
Question #67 of 180 Question ID: 1420253

Which of the following statements regarding the significance level of a hypothesis test
is most accurate?

Given a significance level of 5%, a test will reject a true null hypothesis 5% of the
A)
time.
If the significance level of a test is 5%, it will yield the correct decision about the null
B)
hypothesis 95% of the time.
If the significance level of a test is 95%, it will yield the correct decision about the null
C)
hypothesis 95% of the time.

Question #68 of 180 Question ID: 1420270

The country of Hokah can produce 35 units of cheese or 30 units of leather with one
hour of labor. The country of Ymer can produce 20 units of cheese or 25 units of
leather with one hour of labor. Which of the following statements is most accurate?

A) Ymer’s opportunity cost of one unit of leather is 0.80 units of cheese.


B) Hokah’s opportunity cost of one unit of cheese is 1.167 units of leather.
C) Hokah has an absolute and a comparative advantage in both cheese and leather.

Question #69 of 180 Question ID: 1420300

A company using LIFO reports the following:

Cost of goods sold was $27,000.


Beginning inventory was $6,500, and ending inventory was $6,200.
The beginning LIFO reserve was $1,200.
The ending LIFO reserve was $1,400.

The best estimate of the company's cost of goods sold on a FIFO basis would be:

A) $21,300.
B) $26,800.
C) $27,500.
Question #70 of 180 Question ID: 1420263

Short-run disequilibrium is most likely to be associated with a decreasing price level if


it results from a decrease in:

A) both aggregate demand and short-run aggregate supply.


B) aggregate demand, if short-run aggregate supply is unchanged.
C) short-run aggregate supply, if aggregate demand is unchanged.

Question #71 of 180 Question ID: 1420243

Categorical data can be:

A) nominal, but not ordinal.


B) ordinal, but not nominal.
C) either nominal or ordinal.

Question #72 of 180 Question ID: 1420278

An analyst gathered the following data about a company:

1,000,000 shares of common are outstanding at the beginning of the year.


10,000 6% convertible bonds (conversion ratio is 20 to 1) were issued at par
June 30 of this year.
The company has 100,000 warrants outstanding all year with an exercise price
of $25 per share.
The average stock price for the period is $20, and the ending stock price is $30.

If the convertible bonds are considered dilutive, the number of shares of common
stock that the analyst should use to calculate diluted earnings per share is:

A) 1,000,000.
B) 1,100,000.
C) 1,266,667.
Question #73 of 180 Question ID: 1420291

Degen, Inc., owns a trademark which it originally valued at €15 million on its balance
sheet but currently values at €10 million. In the country where Degen is incorporated,
trademarks are protected by law for as long as their owner remains a going concern.
Degen has most likely:

A) developed its trademark at a cost of €15 million.


B) recorded amortization expense of €5 million on its trademark.
C) recognized €5 million of impairment charges on its trademark.

Question #74 of 180 Question ID: 1420260

If the government regulates a natural monopoly and enforces an average cost pricing,
what are the effects on output quantity and price compared to an unregulated natural
monopoly?

A) Both are lower under average cost pricing.


B) Both are higher under average cost pricing.
C) One is higher and one is lower under average cost pricing.

Question #75 of 180 Question ID: 1420273

Assume that one year ago, the exchange rate between the Japanese yen and the euro
was 100 JPY/EUR, and the exchange rate between the Japanese yen and the U.S. dollar
was 80 JPY/USD. Current exchange rates are 104.2 JPY/EUR and 76.6 JPY/USD. Which
of the following statements is most accurate?

A) The USD has depreciated relative to the EUR.


B) The JPY has depreciated 4.2% relative to the EUR.
C) The current U.S. dollar to euro exchange rate is approximately 1.25 USD/EUR.
Question #76 of 180 Question ID: 1420286

An analyst gathered the following information about a company:

Cash flow from operations $800


Purchase of plant and equipment 40
Sale of land 30
Interest expense 80
Depreciation and amortization 100
The company has a tax rate of 35% and prepares its financial statements
under U.S. GAAP.

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

A) $840.
B) $870.
C) $940.

Question #77 of 180 Question ID: 1420254

An analyst is testing the hypothesis that the variance of monthly returns for Index L
equals the variance of monthly returns for Index M based on samples of 50 monthly
observations. The sample variance of Index L returns is 0.085, whereas the sample
variance of Index M returns is 0.084. Assuming the samples are independent and the
returns are normally distributed, which of the following represents the most
appropriate test statistic?

sample variance of Index L


A) .
sample variance of Index M

variance of Index L−variance of Index M


B) .
standard error of squared differences

(degrees of freedom)×(Index L sample variance)


C) .
Index M sample variance

Question #78 of 180 Question ID: 1420277


Harding Corp. has a permanently impaired asset. The difference between its carrying
value and the present value of its expected cash flows should be written down
immediately and:

A) reported as an operating loss.


B) charged directly against retained earnings.
C) reported as a non-operating loss in other comprehensive income.

Question #79 of 180 Question ID: 1420295

If market interest rates have changed materially since a firm issued a bond, and the
firm uses the effective interest rate method, how is a change in the market value of
the firm's debt most likely to be reported in the firm's financial statements?

The gain or loss in market value must be calculated and disclosed in the footnotes
A)
to the financial statements.
Net income and equity are unaffected, but the change may be discussed in
B)
management’s commentary.
Net income is unaffected, but the change in market value is recorded in other
C)
comprehensive income.

Question #80 of 180 Question ID: 1420246

If the probability of event J multiplied by the probability of event K is not equal to the
joint probability of events J and K, then events J and K are most likely:

A) dependent events.
B) independent events.
C) mutually exclusive events.

Question #81 of 180 Question ID: 1420247


A random variable follows a discrete uniform distribution with possible outcomes of 2,
4, 6, and 12. The standard deviation of the random variable is closest to:

A) 3.50.
B) 3.75.
C) 4.00.

Question #82 of 180 Question ID: 1420265

If the inflation rate was –4% in 20X1, –2% in 20X2, and –1% in 20X3, the economy is
most accurately described as experiencing:

A) deflation.
B) contraction.
C) disinflation.

Question #83 of 180 Question ID: 1420264

Credit cycles are most likely to:

A) dampen business cycles.


B) coincide with business cycles.
C) have longer durations than business cycles.

Question #84 of 180 Question ID: 1420258

An individual sees her income rise from $80,000 to $88,000, and along with it, her
consumption of Good X has decreased from eight dozen packages per year to six
dozen packages per year. Good X should be classified as:

A) a normal good.
B) a Veblen good.
C) an inferior good.

Question #85 of 180 Question ID: 1420282

The direct method of reporting operating cash flow:

A) is preferred by analysts and commercial lenders.


B) is the most frequently used method under both U.S. GAAP and IFRS.
C) shows the reasons for differences between net income and operating cash flows.

Question #86 of 180 Question ID: 1420297

Jordan Loney, CFA, issues a "sell" recommendation on Sullivan Company because she
believes its financial reporting quality is low. Loney writes, "Rapid turnover of key
employees in its information systems and accounting units have made Sullivan's
internal monitoring controls ineffective." Which condition that may lead to low-quality
financial reporting has Loney detected at Sullivan?

A) Opportunity.
B) Motivation.
C) Rationalization.

Question #87 of 180 Question ID: 1420269

The Keynesian view suggests that the government can reduce aggregate demand by
using:

restrictive fiscal policy to shift the government budget toward a surplus (or smaller
A)
deficit).
restrictive fiscal policy to shift the government budget toward a deficit (or a smaller
B)
surplus).
expansionary fiscal policy to shift the government budget toward a surplus (or a
C)
smaller deficit).

Question #88 of 180 Question ID: 1420287

At the beginning of the year, a firm securitizes half of its accounts receivable and uses
the proceeds to pay down principal on a long-term bank loan. These transactions will:

A) increase the firm’s current ratio.


B) decrease the firm’s debt-to-equity ratio.
C) decrease the firm’s interest coverage ratio.

Question #89 of 180 Question ID: 1420283

Interest paid is reported as an operating cash outflow under:

A) U.S. GAAP, but may be reported as a financing cash flow under IFRS.
B) IFRS, but may be reported as an investing cash flow under U.S. GAAP.
U.S. GAAP, but must be reported as either an investing or financing cash flow under
C)
IFRS.

Question #90 of 180 Question ID: 1420249

A researcher needs to choose a probability distribution for the price of an asset that is
quite volatile in order to simulate returns outcomes. She has a program that will
generate random variables from any of a variety of distributions. The most
appropriate distribution for her to select to generate the asset price distribution is a:

A) normal distribution.
B) lognormal distribution.
C) Student’s t-distribution.
Question #91 of 180 Question ID: 1420310

Which of the following statements about the component costs of capital is least
accurate?

A) The cost of common equity is the required rate of return on common stock.
The cost of preferred stock is the preferred dividend divided by the preferred’s par
B)
value.
The after-tax cost of debt is based on the expected yield to maturity on newly issued
C)
debt.

Question #92 of 180 Question ID: 1420318

If a firm's breakeven quantity of sales is equal to its operating breakeven quantity of


sales, its degree of:

A) total leverage is 1.0.


B) financial leverage is 1.0.
C) operating leverage is 1.0.

Question #93 of 180 Question ID: 1420382

An investment advisor constructs a portfolio that plots on the capital market line but
has less risk and a lower return than the market portfolio. This portfolio is most
accurately described as:

A) a lending portfolio.
B) a leveraged portfolio.
C) an inefficient portfolio.

Question #94 of 180 Question ID: 1420476


AlcoBanc owns a piece of property that is under consideration for a new bank branch.
Which of the following is least likely a relevant incremental cash flow in analyzing this
project? The:

A) interest costs of a loan for the property purchase.


B) business gained at other branches due to new customers at the proposed site.
$150,000 AlcoBanc could get if they sold the property instead of building a new
C)
branch.

Question #95 of 180 Question ID: 1420384

A stock has a beta of 0.9 and an estimated return of 10%. The risk-free rate is 7%, and
the expected return on the market is 11%. According to the CAPM, this stock:

A) is overvalued.
B) is undervalued.
C) is properly valued.

Question #96 of 180 Question ID: 1420313

Which of the following most accurately characterizes a company in the mature stage
of the industry life cycle?

A) High business risk.


B) Increasing growth rate of revenue.
C) Significant use of debt financing.

Question #97 of 180 Question ID: 1420314

With respect to firms in the financial services industry, a conflict between the interests
of shareholders and regulators is best illustrated by a shareholder preference for:

A) a decrease in the firm’s equity capital.


B) a decrease in the firm’s equity multiplier.
C) an increase in the value of a firm’s equity.

Question #98 of 180 Question ID: 1420303

Which of the following is most likely a violation of a pension fund's fiduciary duty?

A) Using ESG factors when estimating companies’ expected returns.


B) Choosing one stock over another similar stock because of ESG considerations.
Allocating 10% of assets to the five companies in its investing universe with the
C)
highest ESG scores.

Question #99 of 180 Question ID: 1420378

In which step of the portfolio management process does an investment manager


rebalance the portfolio to its target asset allocation percentages?

A) Analysis step.
B) Feedback step.
C) Execution step.

Question #100 of 180 Question ID: 1420308

Which of the following is most likely to improve a company's cash position, other
things equal?

A) Decreasing days’ payables.


B) Decreasing inventory turnover.
C) Decreasing credit terms from 2/60 to 2/45.
Question #101 of 180 Question ID: 1420315

A model that concludes there are optimal amounts of both debt and equity in a
company's capital structure least likely requires an assumption that:

A) there are no taxes.


B) interest is deductible for tax.
C) financial distress imposes costs.

Question #102 of 180 Question ID: 1420383

Greenbaum, Inc. stock pays no dividend and currently trades at $54. Based on the
CAPM and assuming an expected return on the market of 12% and a risk-free rate of
8%, the expected price for Greenbaum one year from now is $62. The beta of
Greenbaum shares is closest to:

A) 1.5.
B) 1.6.
C) 1.7.

Question #103 of 180 Question ID: 1420381

Which of the following possible portfolios cannot lie on the efficient frontier?

Portfolio Expected Return Standard Deviation


1 8% 6%
2 10% 6%
3 14% 12%
4 14% 16%

A) Portfolio 3 only.
B) Portfolios 1 and 4.
C) Portfolios 2 and 3.
Question #104 of 180 Question ID: 1420388

An investor who exhibits hyperbolic discounting most likely:

A) takes personal credit for gains and blames others for losses.
B) favors small gains in the short term over larger gains in the long term.
C) experiences greater pain from a loss than pleasure from an equal-sized gain.

Question #105 of 180 Question ID: 1420307

For a project with an initial cost of 1,000 and cash flows of 5,000 for the first year and
–6,000 for the second year, a researcher calculates two IRRs: 100% and 200%. If a
company's cost of capital is 18%, the company should:

A) not accept the project.


B) accept the project because its cost of capital is less than 100%.
C) accept the project because its cost of capital is less than 200%.

Question #106 of 180 Question ID: 1420385

In the context of the capital asset pricing model, an active manager would be most
likely to purchase a security that plots:

A) on the security market line.


B) below the security market line.
C) above the security market line.

Question #107 of 180 Question ID: 1420379

The investment needs of property and casualty insurers are characterized by a:


A) short-term time horizon and low risk tolerance.
B) long-term time horizon and high risk tolerance.
C) short-term time horizon and high risk tolerance.

Question #108 of 180 Question ID: 1420301

Which of the following relationships among a company's stakeholders is most


accurately described as a principal-agent relationship? The relationship between a
company's managers and its:

A) creditors.
B) regulators.
C) shareholders.

Question #109 of 180 Question ID: 1420311

Inez Company has the following target capital structure: 35% debt, 55% common
stock, and 10% preferred stock. The company's before-tax cost of debt is 6%, its cost
of common stock is 10%, and its cost of preferred stock is 8%. The company's
marginal tax rate is 40%. What is Inez's weighted average cost of capital?

A) 7.14%.
B) 7.56%.
C) 8.40%.

Question #110 of 180 Question ID: 1420316

Agency costs of equity:

A) are unaffected by capital structure.


B) increase with greater debt in the capital structure.
C) decrease with greater debt in the capital structure.
Question #111 of 180 Question ID: 1420304

A portfolio manager who tracks the industry weights of a benchmark index, but within
each industry selects stocks with favorable ESG factors, is said to be engaging in:

A) active ownership.
B) thematic investing.
C) best-in-class investing.

Question #112 of 180 Question ID: 1420309

Over the last 12 months, M&N Company has been using its accounts payable as an
internal source of funds. This month, M&N's largest supplier changed its invoice terms
from 2/20 net 90 to 2/10 net 60. Going forward, this change is most likely to:

A) increase M&N’s days of payables.


B) decrease M&N’s days of payables.
C) have no effect on M&N’s days of payables.

Question #113 of 180 Question ID: 1420380

Using historical index returns for an equities market over a 20-year period, an analyst
has calculated the average annual return as 5.60% and the holding period return as
170%. The compound annual index return over the period is closest to:

A) 2.69%.
B) 5.09%.
C) 5.24%.

Question #114 of 180 Question ID: 1420477


Two of the typical steps in the capital allocation process are:

A) analyzing project proposals and raising additional capital.


B) raising additional capital and creating the firm-wide capital budget.
C) analyzing project proposals and creating the firm-wide capital budget.

Question #115 of 180 Question ID: 1420302

Which of the following board committees is most likely to be required by regulations?

A) Audit committee.
B) Nominations committee.
C) Compensation committee.

Question #116 of 180 Question ID: 1420386

Which portion of an investment policy statement is most likely to state any restriction
on portfolio leverage?

A) Procedures.
B) Investment guidelines.
C) Duties and responsibilities.

Question #117 of 180 Question ID: 1420389

Non-financial sources of risk for an organization most likely include:

A) credit risk.
B) liquidity risk.
C) solvency risk.
Question #118 of 180 Question ID: 1420317

Under what conditions will the percentage change in a company's earnings per share
be larger than the percentage change in its earnings before interest and taxes (EBIT)?
The company's degree of:

A) operating leverage is positive.


B) total leverage is greater than one.
C) financial leverage is greater than one.

Question #119 of 180 Question ID: 1420312

A new project will require a company to issue both debt and common equity. In
estimating the project's net present value (NPV), an analyst increases the initial outlay
for this project by the flotation cost of the equity securities. Has the analyst treated
flotation costs correctly?

A) Yes.
B) No, because flotation costs are a sunk cost.
C) No, because the cost of capital should be adjusted for flotation costs.

Question #120 of 180 Question ID: 1379865

If a stock's beta is equal to 1.2, its standard deviation of returns is 28%, and the
standard deviation of the returns on the market portfolio is 14%, the covariance of
the stock's returns with the returns on the market portfolio is closest to:

A) 0.168.
B) 0.024.
C) 0.600.

Question #121 of 180 Question ID: 1420365


Based on parity relations for options prices, the value of a put minus the value of a
call (on the same asset with same exercise prices) must equal:

the price of a forward contract on the asset minus the present value of the option
A)
exercise price.
the present value of the price of a forward contract on the asset minus the option
B)
exercise price.
the present value of the difference between the option exercise price and the price
C)
of a forward contract on the asset.

Question #122 of 180 Question ID: 1420321

A financial market is said to be operationally efficient if:

A) transactions costs are low.


B) prices adjust quickly to new information.
C) it results in resources being allocated to their most productive uses.

Question #123 of 180 Question ID: 1420324

Which of the following statements about alternative investment indexes is most


accurate?

An investor can replicate a commodity index by making direct investments in the


A)
underlying physical commodities.
Real Estate Investment Trust indexes track the prices of shares of publicly traded
B)
companies that invest in mortgages or real property.
Hedge fund indexes accurately represent the investment performance of the hedge
C)
fund industry.

Question #124 of 180 Question ID: 1420350


An investor with an investment horizon of 5 years has purchased a 15-year 6%
coupon bond at par. The bond has a modified duration of 9.8. The duration gap for
this investor is closest to:

A) –4.2.
B) 4.8.
C) 5.4.

Question #125 of 180 Question ID: 1420355

Which of the following intangible assets is most likely to represent high-quality


collateral in credit analysis?

A) Goodwill.
B) Trademarks.
C) Deferred tax assets.

Question #126 of 180 Question ID: 1420351

An analytical duration would be preferred to an empirical duration in instances


where:

A) the goal is to test the sensitivity of assumptions.


the change in the credit spread is positively correlated with the change in the
B)
benchmark yield curve.
the change in the credit spread is negatively correlated with the change in the
C)
benchmark yield curve.

Question #127 of 180 Question ID: 1420376


The following information applies to JNC Advisers, a hedge fund:

$250 million in AUM as of prior year-end


2% management fee (based on year-end AUM)
20% incentive fee calculated net of management fees, using a 4% soft hurdle
rate and a high-water mark ($275 million as of prior year-end)

In the current year, the fund's gross return is 20%. An investor's net-of-fees return for
the year is closest to:

A) 13.0%.
B) 15.6%.
C) 16.1%.

Question #128 of 180 Question ID: 1420331

A non-cumulative preferred stock will be most risky if it is:

A) putable.
B) callable.
C) option-free.

Question #129 of 180 Question ID: 1420335

An analyst is valuing a company's perpetual preferred stock that pays a $6 annual


dividend. The company's bonds currently yield 7.5% and preferred shares are selling
to yield 75 basis points below the company's bond yield. The value of the preferred
stock is closest to:

A) $72.
B) $80.
C) $89.

Question #130 of 180 Question ID: 1420364


Question #130 of 180 Question ID: 1420364

If the risk-free rate of interest is 3%, the spot price of an asset is 35, and its net cost of
carry is –2, the no-arbitrage price of a one-year forward contract on units of the asset
is closest to:

A) 33.99.
B) 38.05.
C) 38.11.

Question #131 of 180 Question ID: 1420352

If a bond has a convexity of 120 and a modified duration of 10, the convexity
adjustment (to a duration-based approximation) associated with a 25 basis point
interest rate decline is closest to:

A) –2.875%.
B) –2.125%.
C) +0.0375%.

Question #132 of 180 Question ID: 1420387

Compared to brownfield infrastructure investments, greenfield infrastructure


investments are more appropriate for investors with:

A) lower liquidity needs and lower risk tolerance.


B) higher risk tolerance and shorter time horizons.
C) longer time horizons and lower liquidity needs.

Question #133 of 180 Question ID: 1420320


An investor buys a stock at $32 a share and deposits 50% initial margin. Assume that
the maintenance margin is 25%, the stock pays no dividends, and transaction costs
and interest on the margin loan are zero. The price at which the investor would
receive a margin call is closest to:

A) $16.
B) $21.
C) $24.

Question #134 of 180 Question ID: 1420357

Recent economic data suggest an increasing likelihood that the economy will soon
enter a recessionary phase. What is the most likely effect on the yields of lower-
quality corporate bonds and on credit spreads of lower-quality versus higher-quality
corporate bonds?

A) Both will increase.


B) Both will decrease.
C) One will increase and one will decrease.

Question #135 of 180 Question ID: 1420478

Which of the following statements for puts at expiration is least accurate? The:

A) put buyer’s maximum loss is the put option’s premium.


B) maximum loss to the writer of a put is the exercise price less the premium.
put holder will exercise the option whenever the stock’s price is greater than the
C)
exercise price.

Question #136 of 180 Question ID: 1420327

Which of the following scenarios is inconsistent with efficient financial markets?


An analyst’s buy recommendations have returned 2% more than the broad market
A)
index, on average.
Johnson, Inc. reports an increase of 8% in its earnings from a year earlier, and its
B)
stock price declines 5% on the news.
Earl Baker, an investor, earns consistently superior risk-adjusted returns by buying
C) stocks when most investment advisors are pessimistic and selling stocks when most
investment advisors are optimistic.

Question #137 of 180 Question ID: 1420329

The holder of the type of security that has a priority in liquidation less than that of
bonds or promissory notes issued by the company but ahead of that of common
stock is most likely to have:

A) no voting rights.
B) statutory voting rights.
C) cumulative voting rights.

Question #138 of 180 Question ID: 1420325

Transactions costs incurred from portfolio rebalancing are most likely to be highest
for funds that track:

A) price-weighted indexes.
B) value-weighted indexes.
C) equal-weighted indexes.

Question #139 of 180 Question ID: 1420369

When compared to direct investing, fund investing offers:

A) greater diversification.
B) higher minimum investments.
C) a higher degree of investor involvement.

Question #140 of 180 Question ID: 1420373

A hedge fund will honor redemption requests at any time within 30 days of the
request, but it will charge a significant fee for redemption requests received during
the first two years. These terms are most appropriately referred to as a two-year:

A) penalty period.
B) soft lockup period.
C) redemption restriction period.

Question #141 of 180 Question ID: 1420339

A supranational bond:

A) is issued by a multilateral agency.


B) trades outside the jurisdiction of any one country.
C) pays coupons in a different currency than its principal.

Question #142 of 180 Question ID: 1420356

If an investor wants only investment grade bonds in her portfolio, she would be least
likely to purchase a:

A) 2-year municipal bond rated A–.


B) 3-year municipal bond rated BB.
C) 15-year, semiannual coupon corporate bond rated BBB.
Question #143 of 180 Question ID: 1420336

A stock that currently does not pay a dividend is expected to pay its first dividend of
$1.00 five years from today. Thereafter, the dividend is expected to grow at an annual
rate of 25% for the next three years and then grow at a constant rate of 5% per year
thereafter. The required rate of return is 10.3%. The value of the stock today is closest
to:

A) $20.65.
B) $22.72.
C) $23.87.

Question #144 of 180 Question ID: 1420361

If, at expiration, the price of a stock is $43, the profit or loss to the writer of a put
option at $45 is:

A) a $2 loss.
B) a $2 profit.
C) no profit or loss.

Question #145 of 180 Question ID: 1420348

Changes in a fixed-coupon bond's cash flows that result from changes in yield would
be reflected in the bond's:

A) effective duration.
B) modified duration.
C) Macaulay duration.

Question #146 of 180 Question ID: 1420377


A hedge fund that invests in nontraded securities uses a pricing model to calculate
portfolio values. The most likely result of this method for portfolio valuation is upward
bias to:

A) Sharpe ratios.
B) returns over time.
C) return correlations with other investments.

Question #147 of 180 Question ID: 1420338

Roger Gould, CFA, is analyzing the stock of Zero Incorporated and trying to determine
which price multiple to use in his valuation. Zero, a start-up, had losses over the last
12 months and is projected to have a loss over the next 12 months. Zero has
significant internally generated intangible assets and human capital that Gould would
like to capture in his valuation. The price multiple that Gould should most
appropriately use is the:

A) price-to-sales ratio.
B) price-to-book value.
C) price-to-earnings ratio.

Question #148 of 180 Question ID: 1420367

An American put option on a stock is most likely to have a higher value than an
otherwise identical European put option:

A) if the stock pays a dividend.


B) when the options are at the money.
C) when the options are in the money.

Question #149 of 180 Question ID: 1420345


Four non-convertible bonds have the indicated yield spreads to Treasury securities:

Maturity Government Zero- Volatility Option- Adjusted


Spread Spread Spread
Bond
2 years 156 bp 155 bp 130 bp
W
Bond
3 years 173 bp 174 bp 199 bp
X
Bond
5 years 188 bp 189 bp 164 bp
Y
Bond
10 years 202 bp 201 bp 226 bp
Z

Based on these spreads, it is most likely that:

A) Bond X is callable, and Bond Y is putable.


B) Bond W is callable, and Bond Z is putable.
C) Bond Z is callable, and the spot yield curve is inverted.

Question #150 of 180 Question ID: 1420344

Based on the following interest rates:

1-year spot rate 3.0%


1-year forward rate one year from now 5.0%
2-year forward rate one year from now 6.5%

The 3-year spot rate is closest to:

A) 5.0%.
B) 5.3%.
C) 9.3%.

Question #151 of 180 Question ID: 1420332


An analyst classifies Mettler, Inc., an operator of retail grocery stores, in the same
industry group as Powell Corporation, a manufacturer of industrial machinery. This
analyst's classification system is most likely based on:

A) statistical methods.
B) products and services.
C) sensitivity to the business cycle.

Question #152 of 180 Question ID: 1420370

Compared to traditional investments, alternative investments are most likely to


exhibit:

A) greater regulation.
B) less manager specialization.
C) more-concentrated portfolios.

Question #153 of 180 Question ID: 1420341

An analyst collects the following spot rates, stated as annual BEYs:

6-month spot rate = 6%.


12-month spot rate = 6.5%.
18-month spot rate = 7%.
24-month spot rate = 7.5%.

Given only this information, the price of a 2-year, semiannual-pay, 10% coupon bond
with a face value of $1,000 is closest to:

A) $918.30.
B) $1,000.00.
C) $1,046.77.

Question #154 of 180 Question ID: 1420362


Question #154 of 180 Question ID: 1420362

A programming error resulted in the issuance of a forward contract that ignored the
convenience yield investors realize from holding the underlying asset. To gain an
arbitrage profit from this error, an arbitrageur's position would most likely include a
long position in the:

A) forward contract.
B) underlying asset.
C) risk-free asset.

Question #155 of 180 Question ID: 1420346

Which of the following best describes the motivation for a corporation to issue
securitized bonds? Securitization of specific assets by a corporation enables the
corporation to:

A) improve the recovery rate in the event of default.


B) use the assets as collateral for additional borrowing.
C) get a credit rating on the bonds that will result in a lower cost of borrowing.

Question #156 of 180 Question ID: 1420323

To ensure the continuity of a value-weighted index when one of the stocks in the
index is split:

A) no adjustment is necessary.
B) only the denominator must be adjusted for the split.
C) both the numerator and the denominator must be adjusted for the split.

Question #157 of 180 Question ID: 1420371

Management fees for hedge funds are most likely calculated as a percentage of:
A) committed capital.
B) gains above a hurdle rate.
C) assets under management.

Question #158 of 180 Question ID: 1420340

Which of the following is a risk faced by issuers of commercial paper?

A) Default risk.
B) Rollover risk.
C) Reinvestment risk.

Question #159 of 180 Question ID: 1420349

Other things equal, an increase in an option-free bond's yield to maturity will:

A) increase its interest rate risk.


B) decrease its interest rate risk.
C) not change its interest rate risk.

Question #160 of 180 Question ID: 1420368

An analyst using a one-period binomial model calculates a probability- weighted


average of an option's values following an up-move and a down-move. According to
this model, this average is most likely:

A) equal to the option’s value today.


B) less than the option’s value today.
C) greater than the option’s value today.
Question #161 of 180 Question ID: 1420319

A contract that requires one party to pay $100,000 each quarter to another company
that will make a variable quarterly payment based on the market value of an equities
portfolio is referred to as:

A) a swap.
B) an index option.
C) portfolio insurance.

Question #162 of 180 Question ID: 1420334

Visser, Inc. is an unprofitable fishing enterprise. Visser rents most of its boats and
equipment but owns valuable transferable fishing quotas. If a competitor is interested
in acquiring Visser, the most appropriate equity valuation model to use is:

A) an asset-based valuation model.


B) an earnings multiplier model.
C) a Gordon growth model.

Question #163 of 180 Question ID: 1420358

A credit analyst determines the following selected financial ratios for three firms in an
industry after making all appropriate adjustments:

Johnson Knight Lawrence


EBIT/revenue 0.25 0.30 0.35
EBIT/interest 12.5 14.0 10.5
Debt/capital 0.55 0.70 0.35
Revenue/assets 0.20 0.15 0.10

In evaluating the creditworthiness of these firms, the analyst should conclude that:

Knight has the most favorable leverage and Johnson has the most favorable
A)
coverage.
Lawrence has the most favorable leverage and Knight has the most favorable
B)
coverage.
Johnson has the most favorable leverage and Lawrence has the most favorable
C)
coverage.

Question #164 of 180 Question ID: 1420353

How should an analyst interpret a downward-sloping term structure of yield volatility?


Short-term interest rates are:

A) higher than long-term interest rates.


B) more stable than long-term interest rates.
C) more variable than long-term interest rates.

Question #165 of 180 Question ID: 1420363

Market conditions have increased the storage costs and decreased the convenience
yield of a commodity. Other things equal, what effects will these changes have on the
value of a forward contract on that commodity? The forward contract value:

A) will increase.
B) will decrease.
C) may increase or decrease.

Question #166 of 180 Question ID: 1420372

A provision that ensures that investors in a hedge fund will not pay twice for the same
gains is:

A) a clawback.
B) a hard hurdle rate.
C) a high-water mark.
Question #167 of 180 Question ID: 1420330

In a transaction referred to as a management buyout (MBO):

management sells its shares to an investor group attempting to gain control of a


A)
company.
management buys a controlling interest in a public company to gain control of the
B)
board of directors.
an investor group that includes management buys all the shares of a company and
C)
they no longer trade on an exchange.

Question #168 of 180 Question ID: 1420333

Archer Products is in an industry that has experienced low levels of price competition
but recently excess capacity has led to aggressive price cutting. An analyst would be
least likely to describe Archer's industry as:

A) concentrated and with high barriers to exit.


B) in the shakeout stage with low concentration.
C) in the maturity stage with high barriers to entry.

Question #169 of 180 Question ID: 1420343

For a 5-year pure discount bond that is callable at par after two years, which of the
following yield measures will be lowest?

A) Current yield.
B) Yield to first call.
C) Yield to maturity.

Question #170 of 180 Question ID: 1420374


Quest o : 03

An investor who chooses to invest in a fund-of-funds rather than in an individual


hedge fund is least likely concerned with:

A) diversification among hedge fund strategies.


B) minimizing management and incentive fees.
C) the manager’s expertise in selecting hedge funds.

Question #171 of 180 Question ID: 1420347

What is most likely to happen to the prepayment rate and the weighted average life of
a typical pass-through security if mortgage rates decrease?

A) Both will increase.


B) Both will decrease.
C) One will increase and one will decrease.

Question #172 of 180 Question ID: 1420322

Moore Company stock is currently trading at $40 per share. An investor attempting to
protect against losses of more than 10% on a short position in Moore should place a:

A) stop buy order at $44.


B) stop sell order at $36.
C) limit buy order at $44.

Question #173 of 180 Question ID: 1420359

Which of the following statements most accurately represents the positions of the
parties to a derivatives contract?

A) A call option imposes an obligation to buy the underlying security.


B) A forward contract imposes an obligation on the seller but not the buyer.
Both a put writer and a call writer have an obligation to exchange the underlying
C)
asset.

Question #174 of 180 Question ID: 1420328

Under which of the following conditions are market values of securities most likely to
be persistently greater than their intrinsic values?

A) Short selling is restricted.


B) Transactions costs are high.
C) Arbitrage trading is restricted.

Question #175 of 180 Question ID: 1420354

In what way is approximate convexity different from effective convexity?

Effective convexity takes embedded options into account, while approximate


A)
convexity does not.
Effective convexity results in a more accurate estimate of an option-free bond’s
B)
change in price than approximate convexity.
Approximate convexity can be used with an unequal increase and decrease in yield,
C) while effective convexity can only be used with an equal increase or decrease in
yield.

Question #176 of 180 Question ID: 1420326

A multi-market index is most likely to overweight countries that have recently


experienced high equity market returns if it weights the securities in each country
index by:

A) dividend yield, and weights the country index returns by market capitalization.
B) dividend yield, and weights the country index returns by gross domestic product.
market capitalization, and weights the country index returns by gross domestic
C)
product.

Question #177 of 180 Question ID: 1420375

Compared to investing in commodities, investing in farmland is most likely to provide


which of the following benefits?

A) More liquidity.
B) Higher income.
C) Better inflation hedge.

Question #178 of 180 Question ID: 1420342

Accrued interest is the difference between a coupon bond's:

A) flat price and full price.


B) clean price and flat price.
C) invoice price and dirty price.

Question #179 of 180 Question ID: 1420366

Given the put-call parity relationship, a synthetic underlying asset can be created by
forming a portfolio of a:

A) long call, long put, and short risk-free bond.


B) long call, short put, and long risk-free bond.
C) short call, long put, and long risk-free bond.

Question #180 of 180 Question ID: 1420337


An analyst gathered the following data about a stock:

The stock paid a $1 dividend last year.


Next year's dividend is projected to be 10% higher.
The stock is projected to sell for $25 at the end of the year.
The risk-free rate of interest is 8%.
The expected return on the market is 13%.
The stock's beta is 1.2.

The value of the stock today is closest to:

A) $19.45.
B) $22.89.
C) $26.74.

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