And the price level michael parkin modular level

Questions 1 through 18 relate to Ethical and Professional Standards.

Answer = A

“Guidance for Standards I–VII,” CFA Institute
2013 Modular Level I, Vol. 1, Reading 2, Standard III (B) Fair Dealing
Study Session 1–2–c
Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.

“Guidance for Standards I–VII,” CFA Institute
2013 Modular Level I, Vol. 1, Reading 2, Standard I (B) Independence and Objectivity
Study Session 1–2–c
Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.

C is correct because Standard I (B) Independence and Objectivity requires members and candidates to use reasonable care and judgment to maintain their independence and objectivity in their professional activities. Best practice dictates that Kumar only accept transportation to the remote mining sites in that it is unlikely he would be able to source commercial flights to the locations and ground transport may not be viable. Because Kumar would normally visit mining sites around the world as part of his job and because he is combining this trip with trip to other mine sites in different countries, it would be inappropriate for Cerberus to pay for the analyst’s travel expenses from London. Although Kumar could go on safari with the group of analysts, he should pay his own way so as to restrict any influence such a gift could possibly have when making his investment recommendations on Cerberus.

B is correct because Naib knowingly misrepresented his qualifications by stating he had obtained an MBA degree at the time of his hire when in fact he had not. This reflects adversely on his professional integrity, violating Standard I (D) Misconduct. Stating he passed his CFA exams in three consecutive years is not a violation of Standard VII (B) Reference to CFA Institute,

the CFA Designation, and the CFA Program if it is factual. There is no evidence given to indicate he did not pass as claimed.

C is correct because Standard III (A) Loyalty, Prudence and Care stipulates that the client owns the brokerage. Therefore members and candidates are required to only use client brokerage to the benefit of the clients (soft commissions policy). Because the firm specializes in domestic equity, an offshore investment database service would not benefit clients.

5.Elbie Botha, CFA, an equity research analyst at an investment bank, disagrees with her research team’s buy recommendation for a particular company’s rights issue. She acknowledges the recommendation is based on a well-developed process and extensive research but feels the valuation is overpriced based on her assumptions. Despite her contrarian view, her name is included on the research report to be distributed to all of the investment bank’s clients. To avoid violating any CFA Institute standards, it would be least appropriate for Botha to undertake which of the following?

C is correct because Standard IV (A) calls for employees to be loyal to their employer by not causing harm. If Botha released a contradictory research recommendation report to clients, it could possibly cause confusion amongst clients and embarrassment to the firm.

6.Colleen O’Neil, CFA, manages a private investment fund with a balanced global investment mandate. Her clients insist that her personal investment portfolio replicate the investments within their portfolio to assure them she is willing to put her money at risk. By undertaking which of the following simultaneous investment actions for her own portfolio would O’Neil most likely be in violation of Standard VI (B) Priority of Transactions?

7.Christina Ng, a Level I CFA candidate, defaulted on a bank loan she obtained to pay for her Master’s degree tuition when her wedding cost more than expected. A micro finance loan company lent her money to pay off the tuition loan in full, including penalties and interest. The micro finance loan company even extended further credit to pay for her parents’ outstanding medical bills. Unfortunately, her parents’ health problems escalated to the point where Ng had to take extensive time away from work to deal with the issues. She was subsequently fired and consequently defaulted on the second loan. Because she was no longer employed, Ng decided to file for personal bankruptcy. Do the loan defaults leading up to Ng’s bankruptcy most likely violate Standard I (D) Misconduct?

A. No
B. Yes, with regard to the first loan default

8.Charles Mbuwanga, a Level III CFA Candidate, is the business development manager for Sokoza Investment Group, an investment management firm with high-net-worth retail clients
throughout Africa. Sokoza introduced listed Kenyan Real Estate Investment Trusts (REITs) to its line of investment products based on new regulations introduced in Kenya so as to diversify its product offering to clients. The product introduction comes after months of researching Kenyan property correlations with other property markets and asset classes in Africa. Sokoza assigns Mbuwanga as part of the sales team in introducing this product to its clients across Africa.

Mbuwanga subsequently determines most of Sokoza’s clients’ portfolios would benefit from having a small Kenyan property exposure to help diversify their investment portfolios. By promoting the Kenyan REITs for Sokoza’s client portfolios as planned, Mbuwanga would least likely violate which of the following standards?

done. He may also be in violation of Standard I (A) Knowledge of the Law in that he would need to determine if the Kenyan REIT product is allowable in each of the countries where his clients reside.

9.Victoria Christchurch, CFA, is a management consultant currently working with a financial services firm interested in curtailing its high staff turnover, particularly amongst CFA
charterholders. In recent months, the company lost 5 of its 10 most senior managers, all of whom have cited systemic unethical business practices as the reason for their leaving. To curtail staff turnover by encouraging ethical behavior, it would be least appropriate for Christchurch to recommend the company do which of the following?

Under Standard I (A) Knowledge of the Law, CFA charterholders and candidates must
disassociate themselves from unethical behavior. Because the unethical business practices are seen as systemic, it would likely require them to leave the firm. Implementing a whistleblowing policy and adopting a corporate code of ethics would likely help to build a foundation of strong ethical behavior.

10.Henrietta Huerta, CFA, writes a weekly investment newsletter to market her services and obtain new asset management clients. A third party distributes the free newsletter on her behalf to those individuals on its mailing list. As a result, it is widely read by thousands of individual investors. The newsletter recommendations reflect most of Huerta’s investment actions. After completing further research on East-West Coffee Roasters, Huerta decides to change her initial buy recommendation to a sell. To avoid violating the CFA Institute Standards of Professional Conduct it would be most appropriate for Huerta to distribute the new investment
recommendation to:

“Guidance for Standards I–VII,” CFA Institute
2013 Modular Level I, Vol. 1, Reading 2, Section Standard III (A) Loyalty, Prudence, and Care Study Session 1–2–c
Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.

B is correct because according to Standard III (A) Loyalty, Prudence and Care members and candidates must place their clients’ interests first before their own interests. The temptation may be to release the changed recommendation to newsletter recipients simultaneously with or even before the asset management clients to try to obtain new clients. However, to avoid violating Standard III (A) Loyalty, Prudence and Care, Huerta must ensure any change in an investment recommendation is first distributed to her asset management clients before any newsletter recipients, who are not necessarily clients (that is, they receive the newsletter for free from a third party distribution list).

C is correct because Deschutes most likely violated Standard III (E) Preservation of
Confidentiality by failing to preserve the confidentiality of client records when she disclosed specific details about clients in the equity portfolio.

12.When Abdullah Younis, CFA, was hired as a portfolio manager at an asset management firm two years ago, he was told he could allocate his work hours as he saw fit. At that time, Younis served on the board of three non-public golf equipment companies and managed a pooled investment fund for several members of his immediate family. Younis was not compensated for his board

“Guidance for Standards I–VII,” CFA Institute
2013 Modular Level I, Vol. 1, Reading 2, Standard IV (B) Additional Compensation Arrangements, Standard VI (A) Disclosure of Conflicts
Study Session 1–2–c
Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.

A is correct because golf equipment is a business independent of the financial services industry such that any board obligations would not likely be considered a conflict of interest requiring disclosure according to Standard IV (B) Additional Compensation Arrangements. Standard IV (B) requires members and candidates to obtain permission from their employer before accepting compensation or other benefits from third parties for the services that might create a conflict with their employer’s interests. Managing investments for family and non-family members could likely create a conflict of interest for Younis’ employer and should be disclosed to his employer.

“Guidance for Standards I–VII”, CFA Institute
2013 Modular Level I, Vol. 1, Reading 2, Standard IV (C) Responsibilities of Supervisors

Study Session 1–2–b
Distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards.

“Guidance for Standards I–VII,” CFA Institute
2013 Modular Level I, Vol. 1, Reading 2, Standard III (B) Fair Dealing, Standard V (A) Diligence and Reasonable Basis, Standard VI (B) Priority of Transactions
Study Session 1–2–b
Distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards.

A is correct because the analyst violated Standard III (B) Fair Dealing by selectively distributing the recommendation only to investment banking clients despite being responsible for making investment recommendations to all group clients. Schleif should distribute the change in recommendation to all clients who received the initial recommendation, not just those within the investment banking division of the group.

Answer = A

“Guidance for Standards I–VII,” CFA Institute
2013 Modular Level I, Vol. 1, Reading 2, Standard V (A) Selecting External Advisers and Subadvisers
Study Session 1–2–b
Distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards.

“Guidance for Standards I–VII,” CFA Institute
2013 Modular Level I, Vol. 1, Reading 2, Standard VI (C) Referral Fees
Study Session 1–2–c
Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.

C is correct because the referral arrangements should be disclosed to potential clients “before entry into any formal agreement for services” and not after the fact. This allows potential clients to consider whether the arrangement causes them any potential harm as a result of the arrangement (e.g., higher fees and potential conflicts of interests).

Answer = C

“Guidance for Standards I–VII,” CFA Institute
2013 Modular Level I, Vol. 1, Reading 2, Standard VII (A) Confidential Program Information Study Session 1–2–b
Distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards.

A. Statement 1
B. Statement 2
C. Statement 3

Answer = C

19.The nominal (quoted) annual interest rate on an automobile loan is 10%. The effective annual rate of the loan is 10.47%. The frequency of compounding periods per year for the loan is closest to:

A.weekly.

B is correct. Use the formula for effective annual rate: EAR = (1 + Periodic interest rate)m – 1.

Iteratively substitute the possible frequency of compounding until the EAR is 10.47%.

C.mesokurtotic (identical to the normal distribution in peakedness).

Answer = B

The sample standard deviation is closest to:

A. 11.92.
B.12.50.
C.13.18.

The sample standard deviation is the (positive) square root of the sample variance.

A.0.1.
B.0.3.
C.0.7.

Answer = A

The initial value of the stock is $80. The probability of an up move in any given period is 75% and the probability of a down move in any given period is 25%. Using the binomial model, the probability that the stock’s price will be $79.20 at the end of two periods is closest to:

Construct a binomial tree to describe stock price movement.

B is correct. Across two periods, there are four possibilities: • an up move followed by an up move ($96.8 end value), • an up move followed by a down move ($79.2 end value),

24.Which of the following statements of null and alternative hypotheses requires a two-tailed test?

A.H0: θ = θ0 versus Ha: θ ≠θ0
B.H0: θ ≤ θ0 versus Ha: θ >θ0
C.H0: θ ≥ θ0 versus Ha: θ <θ0

A.support level.

B.resistance level.

26.You are given the following discrete uniform probability distribution of gross profits from purchase of an option:

“Common Probability Distributions,” Richard A. DeFusco, CFA, Dennis W. McLeavey, CFA, Jerald E. Pinto, CFA, and David E. Runkle, CFA
2013 Modular Level I, Vol. 1, Reading 9, Section 2.1
Study Session 3– 9– d
Calculate and interpret probabilities for a random variable, given its cumulative distribution function.

C is correct. There are two ways to find P(1 ≤ X ≤ 4):
1)Find the sum of four probabilities: P(1), P(2), P(3), and P(4), 0.2 + 0.2 + 0.2 + 0.2 = 0.8.

A. 0.00096.
B. 0.00710.
C. 0.01485.

Answer = C

If he assumes that the S&P return this year will be the same as it was last year, which of the following is the best estimate of the 95% confidence interval for this year’s S&P return?

A. –0.11600 to +0.34400
B. +0.05024 to +0.17775
C. +0.06110 to +0.16690

With sample variance of 0.0529, .The estimated interval is

(√ ) ) = +0.05024 to +0.17775.

“The Time Value of Money,” Richard A. DeFusco, CFA, Dennis W. McLeavey, CFA, Jerald E. Pinto, CFA, and David E. Runkle, CFA
2013 Modular Level I, Vol. 1, Reading 5, Section 2
Study Session 2–5–b
Explain an interest rate as the sum of a real risk-free rate and premiums that compensate investors for bearing distinct types of risk.

A is correct. “The liquidity premium compensates investors for the risk of loss relative to an investment’s fair value if the investment needs to be converted to cash quickly.”

The value of the first quintile is closest to:

A. 10.70%.
B. 10.84%.
C. 11.09%

Therefore, the location of the first quintile is between the volatility of Fund 2 and Fund 3 (because they are ranked in ascending order).

Then, use linear interpolation to find the approximate value of the first quintile: P20 ≈ X2 + (2.80 – 2) × (X3– X2),
where
X2 is the volatility of Fund 2
X3 is the volatility of Fund 3
P20 is the approximate value of the first quintile
P20 ≈ 10.12% + (2.80 – 2) × (10.84% –10.12%) = 10.70%

“Statistical Concepts and Market Returns,” Richard A. DeFusco, CFA, Dennis W. McLeavey, CFA, Jerald E. Pinto, CFA, and David E. Runkle, CFA
2013 Modular Level I, Vol. 1, Reading 7, Section 7.2 (Example 10)
Study Session 2–7–g
Calculate and interpret (1) a range and a mean absolute deviation and (2) the variance and standard deviation of a population and of a sample.

A is correct. The mean absolute deviation (MAD) for a sample is calculated as follow:

32.Consider the following information in relation to a portfolio composed of Fund A and Fund B:

The portfolio standard deviation of returns is closest to:

B is correct. First, calculate the covariance between Fund A and Fund B given the standard deviation of returns and the correlation between the two funds:
Cov(RA, RB) = ρ(RA, RB)σ(RA)σ(RB),
where
σ(RA) = 7%. This is the standard deviation of returns of fund A
σ(RB) = 13%. This is the standard deviation of returns of fund B
ρ(RA, RB) = 0.80. This is the correlation between the returns of Fund A and Fund B. Cov(RA, RB) = 0.80 × 7% × 13%= 0.00728.

Then calculate the portfolio standard deviation of returns as follow:

Alternatively, use correlation directly in the formula for portfolio standard deviation: σRPortfolio=[ 2σ2 RA+ 𝐵2σ2 RB+2𝐵𝜌RA, RB σRA σRB]0.5
σRPortfolio= [(0.70)2×0.072+0.302×0.132+2∗0.70×0.30×0.80×0.07×0.13]0.5=8.35%.

Questions 33 through 44 relate to Economics

The student’s current monthly food budget is $500, the price of a pizza is $5 and the price of cola is $1.25/bottle. If the student’s monthly food budget were to increase to $700, the slope of her demand curve for pizza would be closest to:

B is correct.

C. greater than 60.

Answer = C

60.

A.$6.00, all firms should exit the market in the long run.

B.$3.50, firm X should continue to operate in the short run, but firms Y and Z should shut down production.

B is correct.

A.106.2.
B.106.8.
C.113.4.

Answer = C

“Understanding Business Cycles,” Michele Gambera, CFA, Milton Ezrati, and Bolong Cao, CFA 2013 Modular Level I, Vol. 2, Reading 18, Section 5.1, Exhibit 7
Study Session 5-18-i, j
Describe economic indicators, including their uses and limitations.

Identify the past, current, or expected future business cycle phase of an economy based on economic indicators.

A.E. B.G.

C is correct. The loss in consumer surplus because of higher prices is represented by area E+F+G+H. This exceeds the gains from producer surplus (E) and government revenues on imports (G). Hence, the net welfare effect to the country is a deadweight loss of [E + F + G + H] – [E] – [G] = F+H.

39.The International Bank for Reconstruction and Development most likely:

A is correct. Closely affiliated with The World Bank Group, the International Bank for Reconstruction and Development (IBRD) provides low or no-interest loans and grants to developing countries that have unfavorable or no access to international credit markets.

40.An investor examines the following rate quotes for the Brazilian real and the Australian dollar:

Answer = B

“Currency Exchange Rates,” William A. Barker, CFA, Paul D. McNelis, and Jerry Nickelsburg 2013 Modular Level I, Vol. 2, Reading 21, Section 3.3
Study Session 6–21–f, g
Explain the arbitrage relationship between spot rates, forward rates and interest rates. Calculate and interpret a forward rate consistent with a spot rate and the interest rate in each currency.

Arbitrage profit = BRL521,844 (right side above) – BRL520,500 (left side above) = 1,344.

41.The demand and supply functions for a leading smartphone are furnished below:

A. $250.
B. $300.
C. $425.

Answer = B

A. shut down in the short run and exit in the long run. B. increase its level of production to enter profit territory. C. decrease its level of production to enter profit territory.

Answer = C

Answer = A

“Understanding Business Cycles,” Michele Gambera, CFA, Milton Ezrati, and Bolong Cao, CFA 2013 Modular Level I, Vol. 2, Reading 18, Section 4.2.2
Study Session 5-18-f, g
Explain the construction of indices used to measure inflation.
Compare inflation measures, including their uses and limitations.

Answer = B

“Understanding Business Cycles,” Michele Gambera, CFA, Milton Ezrati, and Bolong Cao, CFA 2013 Modular Level I, Vol. 2, Reading 18, Section 3.3.1
Study Session 5–18–c
Describe theories of the business cycle.

Using the current ratio, when compared with the industry, the firm is best described as being:

A. as liquid.

Study Session 8-26-i, 11-40-b
Calculate and interpret liquidity and solvency ratios.

Compare a company’s liquidity measures with those of peer companies.

The higher the current ratio the more liquid the company. Thus, with a current ratio of 2.6 (1,800 ÷ 700), the company is less liquid than the industry, with a current ratio of 3.2.

Answer = A

“Understanding Income Statements,” Elaine Henry, CFA and Thomas R. Robinson, CFA
2013 Modular Level I, Vol. 3, Reading 25, Section 5.3
“Financial Analysis Techniques,” Elaine Henry, CFA, Thomas R. Robinson, CFA, and Jan Hendrik van Greuning, CFA
2013 Modular Level I, Vol.4, Reading 28, Section 4.6.2
“Introduction to Industry and Company Analysis,” Patrick W. Dorsey, CFA, Anthony M. Fiore, CFA and Ian Rossa O’Reilly, CFA
2013 Modular Level I, Vol.5, Reading 50, Section 5.1.2
Study Sessions: 8-25-e, 8-28-d, 14-50-g
Describe the financial reporting treatment and analysis of non-recurring items (including discontinued operations, extraordinary items, and unusual or infrequent items) and changes in accounting standards.

47.In 2011, a software company recorded unearned revenue related to a software license that it will recognize as revenue during 2012. Ignoring income taxes, this recognition of the software revenue will most likely have which of the following effects on cash from operations in 2012?

A. No effect
B. A decrease
C. An increase

A is correct. The company received the cash in 2011 when it recorded the unearned revenue and it was a part of the cash from operations in that year. In 2012, the revenue is earned but there is no cash exchanged and hence no effect of the cash from operations, ignoring taxes.

48.The following information for the current year is available for a company that prepares its financial statements in accordance with U.S. GAAP.

49.Which of the following activities would an analyst least likely complete as part of the processing data phase of a financial analysis?

A. Analyzing the prospects of the industry
B. Preparing common-sized financial statement data C. Making adjustments for different accounting policies

A. Form 10-K
B. Annual report
C. Proxy statement

Answer = B

• Company 2 has been offering the same products throughout the period, and the demand and cost structures for its products have not experienced any significant changes.

• Company 3 has recently restructured its product offerings focusing on high margin products only.

“Financial Statement Analysis: Applications,” Thomas R. Robinson, CFA, Jan Hendrik van Greuning, CFA, Elaine Henry, CFA, and Michael A. Broihahn, CFA
2013 Modular Level I, Vol. 3, Reading 35, Section 3.1 Example 3
Study Session 10–35–b
Prepare a basic projection of a company’s future net income and cash flow.

B is correct. Company 2 because it has been offering the same products and its demand and cost structures have been stable too. Therefore, the relationship between sales and gross profit (i.e., gross margin) should be stable and most reliable.

Answer = C

“Long-Lived Assets” Elaine Henry, CFA and Elizabeth A Gordon 2013 Modular Level I, Vol. 3, Reading 30, Section 3.1, Example 5 Study Session 9–30–d
Calculate depreciation expense.

A. Investing
B. Financing
C. Operating

Answer = C

Answer = B

“Understanding Cash Flow Statements,”Elaine Henry, CFA, Thomas R. Robinson, CFA, Jan Hendrik van Greuning, CFA, and Michael A Broihahn, CFA
2013 Modular Level I, Vol. 3, Section 4.3
Study Session: 8–27-i
Calculate and interpret free cash flow to the firm, free cash flow to equity, and performance and coverage cash flow ratios.

“Financial Analysis Techniques,”Elaine Henry, CFA, Thomas R. Robinson, CFA, and Jan Hendrik van Greuning, CFA
2013 Modular Level I, Vol. 3, Section 5.1.1, Exhibit 18
Study Session: 8-28-e
Calculate and interpret ratios used in equity analysis, credit analysis, and segment analysis.

B is correct.

“Inventories,”Michael A Broihahn, CFA
2013 Modular Level I, Vol. 3, Section 6, Example 5
Study Session: 9-29-h
Calculate and interpret ratios used to evaluate inventory management.

B is correct. All else held constant, in a period of rising costs the ending inventory would be lower under weighted average and cost of goods sold (CGS) will be higher (compared to FIFO) resulting in lower net income and retained earnings. There will be no impact on the debt level, current or long-term. Therefore the debt-to-equity ratio (Total debt ÷ Total shareholder’s equity) will increase due to the decrease in retained earnings (and lower shareholders’ equity).

“Financial Statement Analysis: An Introduction,” Elaine Henry, CFA and Thomas R. Robinson, CFA 2013 Modular Level 1, Vol.3, Reading 22, Section 3.1.6
Study Session: 7-22-e
Identify and explain information sources that analysts use in financial statement analysis besides annual financial statements and supplementary information.

C is correct. Forward-looking information such as those about planned capital expenditures is typically provided in the management discussion and analysis (MD&A).

Answer = B

“Financial Reporting Mechanics,” Thomas R. Robinson, CFA, Jan Hendrik van Greuning, CFA, Karen O’Connor Rubsam, CFA, Elaine Henry, CFA, and Michael A. Broihahn, CFA
2013 Modular Level 1, Vol.3, Reading 23, Sections 3.2, 4.2
Study Session: 7-23-b, e

A. timeliness and accrual accounting.

B. understandability and verifiability.
C. relevance and faithful representation.

A. U.S. GAAP, intangibles must be valued at historical cost.

B. IFRS, a commercial real estate company should use a liquidity based presentation. C. IFRS, a classified balance sheet must present current assets before non-current assets.

61. A company recorded the following events in 2012:

A is correct.

“Understanding Cash Flow Statements,” Elaine Henry, CFA, Thomas R. Robinson, CFA, Jan Hendrik van Greuning, CFA, and Michael A. Broihahn, CFA
2013 Modular Level I, Vol. 3, Reading 27, Section 2.1
Study Session 8-27-a
Compare cash flows from operating, investing, and financing activities and classify cash flow items as relating to one of those three categories given a description of the items.

B. 120.
C. 138.

Answer = B

If the company used a perpetual system versus a periodic inventory system, the gross margin would most likely be:

“Inventories,” Michael A. Broihahn, CFA
2013 Modular Level 1, Vol.3, Reading 29, Section 3.6
Study Session: 9-29-d, e
Calculate and compare cost of sales, gross profit, and ending inventory using perpetual and periodic inventory systems.

Compare and contrast cost of sales, ending inventory and gross profit using different inventory valuation methods.

"Long-Lived Assets,” Elaine Henry, CFA and Elizabeth A. Gordon 2013 Modular Level 1, Vol.3, Reading 30, Section 8
Study Session: 9-30-g, k

Describe the revaluation model.

B. U.S. GAAP if there is doubt about recovering a deferred tax asset.

C. both IFRS and U.S. GAAP on tax differences arising from the translation of foreign operations.

A. increase in gross margin.

B. decrease in the LIFO reserve.

67. Selected information about a company is as follows:

“Financial Statement Analysis: Applications,” Thomas R. Robinson, CFA, Jan Hendrik van Greuning, CFA, Elaine Henry, CFA and Michael A. Broihahn, CFA
2013 Modular Level 1, Vol. 3, Reading 35, Section 3.2, Example 5
Study Session: 10-35-b
Prepare a basic projection of a company’s future net income and cash flow.

C is correct. Forecasted net income is calculated as follows: Sales $2,500 Given
Variable costs (750) 30% of sales Fixed costs (1,400) Given

“Understanding Cash Flow Statements,” Elaine Henry, CFA, Thomas R. Robinson, CFA, Jan Hendrik van Greuning, CFA, and Michael A. Broihahn, CFA
2013 Modular Level I, Vol. 3, Reading 27, Section 4.3
"Long-Lived Assets,” Elaine Henry, CFA and Elizabeth A. Gordon
2013 Modular Level 1, Vol.3, Reading 30, Section 2.1, Example 1,
Study Session 8-27-i, 9-30-a,
Calculate and interpret free cash flow to the firm, free cash flow to equity, and performance and coverage cash flow ratios.

Distinguish between costs that are capitalised and costs that are expensed in the period in which they are incurred.

Questions 69 through 78 relate to Corporate Finance

69. Two mutually exclusive projects have the following cash flows (€) and internal rates of return (IRR):

Study Session 11-36-c, d, e

Explain how the evaluation and selection of capital projects is affected by mutually exclusive projects, project sequencing, and capital rationing.

B is correct because Project A has a higher NPV and the projects are mutually exclusive, only Project A should be accepted.

70. A company’s asset beta is 1.2 based on a debt-to-equity ratio of 50%. If the company’s tax rate increases, the associated equity beta will most likely:

“Cost of Capital,” Yves Courtois, CFA, Gene C. Lai, and Pamela Peterson Drake, CFA 2013 Modular Level I, Vol.4, Reading 37, Section 4.1.

Study Session 11-37-h
Calculate and interpret the cost of equity capital using the capital asset pricing model approach, the dividend discount model approach, and the bond-yield-plus risk-premium approach.

A.declaration date.

B.ex-dividend date.

B is correct. The ex-dividend date is normally determined by the Securities Exchange on which the shares are listed. The corporation determines the holder-of-record date and declaration date.

72. A firm’s price-to-earnings ratio (P/E) is 12.5. The firm has decided to repurchase shares using external funds that have an after-tax cost of 9%. After the repurchase, the earnings per share (EPS) will most likely:

“Dividends and Share Repurchases: Basics,” George H. Troughton, CFA and Gregory Noronha, CFA
2013 Modular Level I, Vol.4, Reading 39, Section 4.2.1.

Study Session 11-39-d
Calculate and compare the effects of a share repurchase on earnings per share when 1) the repurchase is financed with the company’s excess cash and 2) the company uses funded debt to finance the repurchase.

“Working Capital Management,” Edgar A. Norton, Jr., CFA, Kenneth L. Parkinson, and Pamela Peterson Drake, CFA
2013 Modular Level I, Vol.4, Reading 40, Section 2.1.3.

Study Session 11-40-a
Describe primary and secondary sources of liquidity and factors that influence a company’s liquidity position.

Answer = B

“The Corporate Governance of Listed Companies: A Manual for Investors,” Kurt Schacht, CFA, James C. Allen, CFA, and Matthew Orsagh, CFA, CIPM
2013 Modular Level I, Vol.4, Reading 41, Section: Board Independence.

B.1,000.
C.1,250.

Answer = B

Answer = A

“Working Capital Management,” Edgar A. Norton, Jr., CFA, Kenneth L. Parkinson, and Pamela Peterson Drake, CFA
2013 Modular Level I, Vol. 4, Reading 40, Section 8.4., Example 7
Study Session 11-40-g
Evaluate the choices of short-term funding available to a company and recommend a financing method.

B.All committees within the firm should benefit from the direct guidance of management. C.Appropriate controls and procedures exist that cover management’s activities in running the daily operations of the firm.

Answer = C

78. Which of the following is the least appropriate method for an external analyst to estimate a company’s target capital structure for determining WACC? Using the:

A.averages of comparable companies’ capital structure.

B is correct. An external analyst does not know a company’s actual target capital structure. Consequently, the analyst should rely on market value (not book value) weights for the components of the company’s current capital structure.

Questions 79 through 90 relate to Equity Investments

Answer = C

“Market Organization and Structure,” Larry Harris
2013 Modular Level I, Vol. 5, Reading 46, Section 10
Study Session 13-46-l
Describe the objectives of market regulation.

“Financial Analysis Techniques,” Elaine Henry, CFA, Thomas R. Robinson, CFA, and Jan Hendrik van Greuning, CFA
2013 Modular Level I, Vol. 3, Reading 28, Sections 4.5.2, 4.6.2.

“Introduction to Industry and Company Analysis,” Patrick W. Dorsey, CFA, Anthony M. Fiore, CFA and Ian Rossa O’Reilly, CFA
2013 Modular Level I, Vol. 5, Reading 50, Section 6.1
Study Session 8-28-c, d, e; 14-50-k
Describe the relationships among ratios and evaluate a company using ratio analysis.

A. FCFE is a measure of the firm’s dividend paying capacity.

B. FCFE models provide more accurate valuations than the dividend discount models. C. A firm’s borrowing activities could influence dividend decisions but they would not impact FCFE.

The current value per share of the company’s common stock according to the two-stage dividend discount model is closest to:

A is correct.

Net profit margin = Net earnings ÷ Sales
Net earnings = Net profit margin × Sales;
Dividends per share (“Dn”) = (Net earnings × Payout ratio) ÷ # of outstanding shares; Therefore, D1 = ($180 million × 0.15 × 0.60) ÷ 8 million = $2.00
D2 = $2.00 ×(1+ 0.25) = $2.50
D3 = $2.00 × (1+ 0.25)2 = $3.13
D4 = $2.00 × (1+ 0.25)2 × (1+0.05) = $3.28

“Market Organization and Structure,” Larry Harris
2013 Modular Level I, Vol. 5, Reading 46, Section 5.2, Example 20
Study Session 13-46-f
Calculate and interpret the leverage ratio, the rate of return on a margin transaction, and the security price at which the investor would receive a margin call.

A is correct.

“Market Organization and Structure,” Larry Harris
2013 Modular Level I, Vol. 5, Reading 46, Sections 4.1, 4.2
Study Session 13-46-d
Describe types of financial intermediaries and services they provide.

A is correct. The service that dealers provide is liquidity. Liquidity is the ability to buy or sell with low transaction costs when you want to trade. By allowing their clients to trade when they want to trade, dealers provide liquidity to them.

Compare market orders with limit orders.

B is correct. An order is filled at the best available price as long as this price is lower than the limit price. In this case, the best available price is the market ask price = $49.49 x (1+ 0.7%) = $49.84. Since this price is lower than the limit price of $49.94, the order will be filled at this price

Answer = C

“Market Organization and Structure,” Larry Harris
2013 Modular Level I, Vol. 5, Reading 46, Section 9
Study Session 13-46-k
Describe characteristics of a well-functioning financial system.

The value of the index as of January 1, 2012 is closest to:

A. 1,047.
B. 1,070.
C. 1,094.

TRI = (VPRI1 − VPRI0 + IncI) ÷ VPRI0
where
TRI = the total return of the index portfolio (as a decimal number)
VPRI1= the value of the price return index at the end of the period
VPRI0 = the value of the price return index at the beginning of the period
IncI = the total income (dividends and/or interest) from all securities in the index held over the period
-4.5% = (1000 - VPRI0 + 23.5 + 21.5) ÷ VPRI0;
VPRI0 = 1000 + 23.5 + 21.5 ÷ (1 - 4.5%) = 1,094.

88. After the public announcement of the merger of two firms an investor makes abnormal returns by going long on the target firm and short on the acquiring firm. This most likely violates which form of market efficiency?

B is correct. In a semi-strong efficient market, prices adjust quickly and accurately to new information. In this case, prices would quickly adjust to the merger announcement and if the market is semi-strong efficient market, investors acting after the merger announcement would not be able to earn abnormal returns. Therefore, it is a violation of the semi-strong form of market efficiency. Note that the semi-strong form of market efficiency encompasses the weak form. Therefore, both weak and semi-strong forms of market efficiency are violated.

89. An analyst gathers the following information about two companies in the same industry:

What is the most appropriate conclusion regarding investors’ expectations? Compared to Company B, Company A has:

A. higher intrinsic value as reflected by its higher market price.

C is correct. The price-to-book ratio, which is also referred to as the market-to-book ratio, provides an indication of investors’ expectations about a company’s future investment and cash flow-generating opportunities. The larger the price-to-book ratio (i.e., the greater the
divergence between market value per share and book value per share), the more favorably investors will view the company’s future investment opportunities. In this case, as shown below, Company A has lower price-to-book ratio than Company B and therefore an expectation of lower future investment opportunities.

“Equity Valuation: Concepts and Basic Tools,” John J. Nagorniak, CFA, and Stephen E. Wilcox, CFA
2013 Modular Level I, Vol. 5, Reading 51, Section 5.1, Example 11
Study Session 14-51-h

Calculate and interpret the following multiples: price to earnings, price to an estimate of operating cash flow, price to sales, and price to book value.

91. A corporation issues 5-year fixed-rate bonds. Its treasurer expects interest rates to decline for all maturities for at least the next year. She enters into a 1-year agreement with a bank to receive quarterly fixed-rate payments and to make payments based on floating rates benchmarked on 3-month LIBOR. This agreement is best described as a:

A.swap.

92. A portfolio manager is required to sell 31,250 shares of XYZ Inc. in two months. She is concerned the price of XYZ shares will decline during the 2-month period, so she enters into a

deliverable equity forward contract to sell 31,250 shares of XYZ in two months for EUR 160 per share. When the contract expires, XYZ is trading at EUR 138 per share. The portfolio manager will most likely:

C is correct because the portfolio manager entered into a contract to sell the stock to the dealer at $160 per share in 2 months time. 31,250 shares x EUR 160 = EUR 5,000,000.

93. A trader takes a long position in 40 futures contracts on Day 1. The futures have a daily price limit of $5 and closes with a settlement price of $106. On Day 2, the futures trade at $111 and the bid and offer move to $113 and $115, respectively. The futures price remains at these price levels until the market closes. The marked-to-market amount the trader receives in his account at the end of Day 2 is closest to:

94. An investor is long an in-the-money American call option on a dividend paying stock. Would this option most likely ever be exercised early?

A.No.

C is correct because a cash flow such as a dividend payment is required for an early exercise. A dividend payment doesn’t guarantee early exercise, as the dividend also needs to be large enough to justify the early exercise.

95. A European company issues a 5-year euro-denominated bond with a face value of EUR 50,000,000. The company then enters into a 5-year currency swap with a bank to convert the EUR exposure into USD exposure. The notional principals of the swap are EUR 50,000,000 and USD 70,000,000. The European company pays a fixed rate of 5% and the bank pays a fixed rate of 4.5%. Payments are made semiannually on a basis of 30 days per month and 360 days per year. What is the payment from the bank to the company at the end of year 4?

96. An investor with $5000 to invest believes that the price of ABC Corp. stock will appreciate by $7 to $95 in two months. The two-month at-the-money put on one share of ABC stock costs $1.76, while the two-month at-the-money call costs $1.56. In order to profit from his view on ABC stock, he will most likely:

A.sell calls on shares of ABC.
B.sell puts on shares of ABC.
C.buy calls on shares of ABC.

97. If a bond’s issuer is required to retire a specified portion of the issue each year, the bond most likely:

A.is callable.

C is correct because a sinking fund provision requires retirement of a portion of the bond issue each year, rather than retirement of the entire issue at maturity.

98. One reason why the duration of a portfolio of bonds does not properly reflect that portfolio’s yield curve risk is the duration measure:

Describe yield-curve risk and explain why duration does not account for yield-curve risk.

A is correct because duration assumes all interest rates across the yield curve change by the same amount and therefore each bond’s yield changes by the same amount.

Answer = B

“Understanding Yield Spreads”, Frank J. Fabozzi, CFA
2013 Modular Level I, Vol. 5, Reading 55, Section 4.6.1
Study Session 15-55-i
Calculate the after-tax yield of a taxable security and the tax-equivalent yield of a tax-exempt security.

Answer = A

“Understanding Yield Spreads”, Frank J. Fabozzi, CFA 2013 Modular Level I, Vol. 5, Reading 55, Section 3.3 Study Session 15-55-d
Define a spot rate.

C.stay the same.

Answer = A

Answer = A

“Introduction to the Valuation of Debt Securities”, Frank J. Fabozzi, CFA 2013 Modular Level I, Vol. 5, Reading 56, Section 2.6
Study Session 16-56-c
Calculate the value of a bond (coupon and zero-coupon).

103. All else equal, the difference between the nominal spread and the Z-spread for a non-Treasury security will most likely be larger when the:

A.yield curve is flat.

B is correct because the main factor causing any difference between the nominal spread and the Z-spread is the shape of the Treasury spot rate curve. The steeper the spot rate curve, the greater the difference.

104. Assume the following six-month forward rates (presented on an annualized, bond-equivalent basis) were calculated from the yield curve.

A.increases measurement accuracy.

B.is easier to model than scenario analysis.

106. An analyst uses a valuation model to estimate the value of an option-free bond at 92.733 to yield 11%. If the value is 94.474 for a 60 basis point decrease in yield and 91.041 for a 60 basis point increase in yield, the effective duration of the bond is closest to:

A.1.85.
B.3.09.
C.6.17.

A.put the issue.

B.call the issue.

108. The bonds issued by ALS Corp. are currently priced at 108.00 and are option free. Based on a portfolio manager’s valuation model, a 10 basis points rise in interest rates will result in the bond price falling to 106.50 while a 10 basis points fall in interest rates will result in the bond price rising to 110.00. The market value of the portfolio manager’s holdings of ALS bonds is $2 million. The expected change in the market value of this holding for a 100 basis point change in interest rates will be closest to:

A.$124,000.
B.$322,600.
C.$645,200.

The approximate percent change in the value of the holdings (the dollar duration) is: 0.1613 × 2,000,000 = $322,600.

Questions 109 through 114 relate to Alternative Investments.

“Introduction to Alternative Investments,” Terri Duhon, George Spentzos, CFA, and Scott D.

Stewart, CFA
2013 Modular Level I, Vol. 6, Reading 66, Sections 2.1 Study Session 18-66-b
Describe categories of alternative investments.

C. convenience yield.

Answer = B

C. reduce exposure to inflation.

Answer = C

A. assets are not marked to market.

B. data are subject to survivorship bias.

C is correct. Since commodity indices are constructed using commodity futures and not the underlying commodities there can be differences between commodity index returns and the returns of the underlying commodities.

113. Which of the following investments most likely provides an investor with indirect, equity exposure to real estate?

“Introduction to Alternative Investments,” Terri Duhon, George Spentzos, CFA, and Scott D.

Stewart, CFA
2013 Modular Level I, Vol. 6, Reading 66, Sections 5.1, 5.2 Study Session 18-66-d

exposure. Real estate investment partnerships are a form of direct real estate equity investment.

Commercial mortgage backed securities (CMBS) provides investors with indirect, debt investment

Answer = A

“Introduction to Alternative Investments,” Terri Duhon, George Spentzos, CFA, and Scott D.

The incentive fee = ($541,500,000 - $475,000,000) × 0.10 = $6,650,000

Total fees = $14,772,500

Answer = A

"Portfolio Management: An Overview” by Robert M. Conroy, CFA and Alistair Byrne, CFA Modular Level I, Vol. 4, Reading 42, Section 3 (Exhibit 14)

The 2012 return needed to achieve a trailing five year geometric mean annualized return of 5.0% when calculated at the end of 2012 is closest to:

Holding period total return (cumulative) factor calculation through 2011:
(1-0.348)×(1+0.322)×(1+0.111)×(1-0.014) = 0.652 × 1.322 × 1.111 × 0.986 = 0.9442 Compound total return (cumulative) factor at 5% per year of five percent for five years: 1.055 = 1.2763
Return needed in 2012 to achieve a compound annualized return of 5%
1.2763/.9442 = 1.3517 = 35.2 percent
Check: 0.944 × 1.352 = 1.276(1/5) = 1.050 = 5 percent annualized

117. Consider a portfolio with two assets. Asset A comprises 25% of the portfolio and has a standard deviation of 17.9%. Asset B comprises 75% of the portfolio and has a standard deviation of 6.2%. If the correlation of these two investments is 0.5, the portfolio standard deviation is closest to:

A. 1.02.
B. 1.05.
C. 1.16

Answer = B

A. M-squared
B. Sharpe ratio
C. Treynor ratio

Answer = C

A. low ability to take risk, but a high willingness to take risk B. high ability to take risk, but a low willingness to take risk C. high ability to take risk and a high willingness to take risk

Answer = C

2013 Level I Mock Exam: Morning Session
The morning session of the 2013 Level I Chartered Financial Analyst (CFA®) Mock Examination has 120 questions. To best simulate the exam day experience, candidates are advised to allocate an average of 1.5 minutes per question for a total of 180 minutes (3 hours) for this session of the exam.

A. reducing each pension fund’s allocation proportionately.

B. distributing them equally amongst all the pension fund portfolios.

2.Dilshan Kumar, CFA, is a world-renowned mining analyst based in London. Recently, he received an invitation from Cerberus Mining, a London Stock Exchange listed company with headquarters in Johannesburg, South Africa. Cerberus asked Kumar to join a group of prominent analysts from around the world on a tour of its mines in South Africa, some of which are in remote locations, not easily accessible. The invitation also includes an arranged wildlife safari to Krueger National Park for the analysts. Kumar accepts the invitation, planning to visit other mining companies he covers in Namibia and Botswana after the safari. To prevent violating any CFA Institute Standards of Professional Conduct, it is most appropriate for Kumar to only accept which type of paid travel arrangements from Cerberus?

A. Ground transportation to Krueger National Park
B. Economy class round trip ticket from London to Johannesburg
C. Flights on a private airplane to the remote mining sites in South Africa

A. No
B. Yes, with regard to Misconduct
C. Yes, with regard to Reference to the CFA Designation

Answer = B

A. Equity research reports
B. Investment conference attendance
C. Database services for offshore investments

Answer = C

Answer = C

“Guidance for Standards I–VII”, CFA Institute
2013 Modular Level I, Vol. 1, Reading 2, Standard IV (A) Loyalty, Standard V (A) Diligence and Reasonable Basis
Study Session 1–2–b

Answer = B

“Guidance for Standards I–VII,” CFA Institute
2013 Modular Level I, Vol. 1, Reading 2, Standard VI (B) Priority of Transactions
Study Session 1–2–b
Distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards.

Answer = A

“Guidance for Standards I–VII,” CFA Institute
2013 Modular Level I, Vol. 1, Reading 2, Standard I (D) Misconduct
Study Session 1–2–a
Demonstrate the application of the Code of Ethics and Standards of Professional Conduct to situations involving issues of professional integrity.

Answer = C

“Guidance for Standards I–VII,” CFA Institute
2013 Modular Level I, Vol. 1, Reading 2, Standard I (A) Knowledge of the Law, Standard I (B) Independence and Objectivity, Standard III (C) Suitability
Study Session 1–2–c
Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.

Answer = B

“Guidance for Standards I–VII,” CFA Institute
2013 Modular Level I, Vol. 1, Reading 2, Standard I (A) Knowledge of the Law
Study Session 1–2–c
Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.

B. asset management clients first.

C. newsletter recipients and asset management clients simultaneously.

A. the stock portfolio’s performance history.
B. her contribution to the portfolio’s returns.
C. providing details of the institutional clients.

Answer = C

Younis has never told his employer about any of these activities. To comply with the CFA Institute Standards of Professional Conduct with regards to his business activities over the past two years, Younis would least likely be required to disclose which of the following to his employer?

A. Board activities
B. Family investment pool management
C. Non-family member management fees

A.firm policies.

B.legal restrictions.
C.industry standards.

14.Sheila Schleif, CFA, is an equity analyst at an investment banking division of Mokara Financial Group, a full service financial group. Schleif uses a multi-factor computer model to make stock recommendations for all clients of Mokara. Schleif discovers the model contains an error. If the error were corrected, her most recent buy recommendation communicated to all clients would change to a sell. Schleif corrects the error, changing the buy to a sell recommendation, and then simultaneously distributes via e-mail the revision to all investment banking clients who received the initial recommendation. A week later, Schleif sells the same shares she held in her personal portfolio. Concerning her actions, Schleif most likely violated which of the following CFA Institute Standards of Professional Conduct?

A. Fair Dealing
B. Priority of Transactions
C. Diligence and Reasonable Basis

A. adherence to strategy.

B. performance measures.

16.Jackson Barnes, CFA, works for an insurance company providing financial planning services to clients for a fee. Barnes has developed a network of specialists, including accountants, lawyers, and brokers who contribute their expertise to the financial planning process. Each of the specialists is an independent contractor. Each contractor bills Barnes separately for the work he or she performs, providing a discount based upon the number of clients Barnes has referred. What steps should Barnes take to be consistent with the CFA Institute Standards of Professional Conduct?

A. Have his independent contractors approved by the insurance company
B. List the consideration he receives from the specialists on monthly client invoices
C. Inform potential clients about his arrangement with the contractors before they agree to hire him

much harder than they had expected and they were not able to complete all questions as a result. The candidates go on to tell Plain about broad topic areas that were tested and complain about specific formulas they had memorized what did not appear on the exam. The Level III candidates least likely violated the CFA Institute Standards of Professional Conduct by
discussing:
A. specific formulas.

B. broad topic areas.

18.On a flight to Europe, Romy Haas, CFA, strikes up a conversation with a fellow passenger, Vincent Trujillo. When Trujillo learns Haas is in the investment profession, he asks about the CFA designation. Haas tells him the following about the CFA designation:
Statement 1: Individuals who have completed the CFA Program have the right to use the CFA designation.

Statement 2: The CFA designation is globally recognized which is why I use it as part of my firm’s name
Statement 3: CFA charterholders must satisfy membership requirements to continue using the designation.

Study Session 1–2–b
Distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards.

C is correct because according to Standard VII (B) Reference to CFA Institute, the CFA
Designation, and the CFA Program this is an accurate statement concerning the CFA designation.

Answer = B

“The Time Value of Money,” Richard A. DeFusco, CFA, Dennis W. McLeavey, CFA, Jerald E. Pinto, CFA, and David E. Runkle, CFA
2013 Modular Level I, Vol. 1, Reading 5, Section 3.3
Study Session 2–5–c, d

20.Equity return series are best described as, for the most part:

A.platykurtotic (less peaked than a normal distribution).

Study Session 2–7–l
Explain measures of sample skewness and kurtosis.

B is correct. Most equity return series have been found to be leptokurtotic.

“Statistical Concepts and Market Returns,” Richard A. DeFusco, CFA, Dennis W. McLeavey, CFA, Jerald E. Pinto, CFA, and David E. Runkle, CFA
2013 Modular Level I, Vol. 1, Reading 7, Section 7.3.2, Example 12
Study Session 2–7–g
Calculate and interpret 1) a range and a mean absolute deviation and 2) the variance and standard deviation of a population and of a sample.

C is correct. The sample mean is:
̅ ∑ / n = (– 3 – 11 + 3 – 18 + 18 + 20 – 6 + 9 + 2 –16) / 10 = –2.00 / 10 = –0.20.

Sum of squared
differences 1563.6
Divided by n –1 173.7333333
Square root 13.18079411

A is correct. Given that X and Y are independent, their joint probability is equal to the product of their individual probabilities. In this problem, we calculate 0.2 × 0.5 = 0.1.

23.Assume that a stock’s price over the next two periods is as shown below.

B. 37.50%.
C. 56.25%.

Answer = B

The probability of an up move followed by a down move is 0.75 × 0.25 = 0.1875.

The probability of a down move followed by an up move is 0.25 × 0.75 also = 0.1875. Both of these sequences result in an end value of $79.2.

“Hypothesis Testing,” Richard A. DeFusco, CFA, Dennis W. McLeavey, CFA, Jerald E. Pinto, CFA, and David E. Runkle, CFA
2013 Modular Level I, Vol. 1, Reading 11, Section 2
Study Session 3– 11– a
Define a hypothesis, describe the steps of hypothesis testing, describe and interpret the choice of the null and alternative hypotheses, and distinguish between one-tailed and two-tailed tests of hypotheses.

A is correct. When the null and alternative hypotheses are of the form: H0: θ = θ0 versus Ha: θ ≠θ0, the correct approach is to use a two-tailed test.

Answer = A

“Technical Analysis,” Barry M. Sine, CFA and Robert A. Strong, CFA
2013 Modular Level I, Vol. 1, Reading 12, Section 3.2
Study Session 3– 12– c
Explain the uses of trend, support, resistance lines, and change in polarity.

The probability of a profit greater than or equal to $1 and less than or equal to $4 is closest to:

A. 0.4.
B. 0.6.
C. 0.8.

In this case, F(4) = P( X ≤ 4) = 1.0 and F(1) = P(X ≤ 1) = 0.2.

Therefore, P(1 ≤ X ≤ 4) = 1.0 – 0.2 = 0.8.

Study Session 3– 10– f
Calculate and interpret the standard error of the sample mean.

C is correct.

“Sampling and Estimation,” Richard A. DeFusco, CFA, Dennis W. McLeavey, CFA, Jerald E. Pinto, CFA, and David E. Runkle, CFA
2013 Modular Level I, Vol. 1, Reading 10, Section 4.2
Study Session 3–10–j
Calculate and interpret a confidence interval for a population mean, given a normal distribution with (1) a known population variance, (2) an unknown population variance, or (3) an unknown variance and a large sample size.

B is correct. The reliability factor for a 95% confidence interval with unknown population variance and sample size greater than 30 is .

B. increased sensitivity of the market value of debt to a change in market interest rates as maturity is extended.

C. possibility that the borrower will fail to make a promised payment at the contracted time and in the contracted amount.

“Statistical Concepts and Market Returns,” Richard A. DeFusco, CFA, Dennis W. McLeavey, CFA, Jerald E. Pinto, CFA, and David E. Runkle, CFA
2013 Modular Level I, Vol. 1, Reading 7, Section 6.1
Study Session 2–7–f
Calculate and interpret quartiles, quintiles, deciles, and percentiles.

A is correct. First, find the position of the first quintile with the following formula:
Ly = (n + 1) × (y / 100),
where
y is the percentage point at which we are dividing the distribution. In our case we have y = 20, which corresponds to the 20th percentile (first quintile);
n is the number of observations (funds) in the peer group. In our case we have n = 13;

The mean absolute deviation of returns for the fund is closest to:

A. 9.53%.
B. 11.91%.
C. 13.69%.

where
Xiis the return of the fund during year i
̅ is the mean of the returns of the sample
n is the number of returns in the sample
i is the index for the year
In this problem:
Mean: ̅ (–20.60% + 15.00% + 0.50% + 9.80% + 4.60%)/5 = 1.86%
MAD = (|–20.60% – 1.86%| + |15.00% – 1.86%| + |0.50% – 1.86%| + |9.80% – 1.86%| + |4.60% – 1.86%|)/5 = 47.64% / 5=9.53%

Answer = B

“Probability Concepts,” Richard A. DeFusco, CFA, Dennis W. McLeavey, CFA, Jerald E. Pinto, CFA, and David E. Runkle, CFA
2013 Modular Level I, Vol. 1, Reading 8, Section 3
Study Session 2–8–k, l
Calculate and interpret covariance and correlation.

where

WA = 70%. This is the weight of Fund A in the portfolio WB = 30%. This is the weight of Fund B in the portfolio.

Answer = B

“Demand and Supply Analysis: Introduction,” Richard V. Eastin and Gary L. Arbogast, CFA 2013 Modular Level I, Vol. 2, Reading 13, Section 3.2, Example 2.

A consumer’s indifference curves are strictly convex and he claims that he is indifferent between Baskets 2 and 3. If he is also indifferent between Baskets 1 and 3, the number of units of A in basket 1 is most likely:

A. equal to 60.

Describe the use of indifference curves, opportunity sets, and budget constraints in decision making.

C is correct. Because the consumer is indifferent between all three baskets, they must all fall on the same indifference curve. The MRSBA at Basket 2 is 4, meaning that the slope of the

Answer = B

“Demand and Supply Analysis: The Firm,” Gary L. Arbogast, CFA and Richard V. Eastin

36.The following data pertain to the total output in units and average selling prices in an economy that produces only two products, X and Y:

C is correct.

37.Which of the following would be most useful as a leading indicator to signal the start of an economic recovery?

A.An increase in aggregate real personal income (less transfer payments)
B.A decrease in average weekly initial claims for unemployment insurance
C.The narrowing of the spread between the 10-year Treasury yield and the federal funds rate

38.

The diagram to the right shows the domestic demand and supply curves for a country that imports a commodity, where PW is its world price and PT is its domestic price after the imposition of a tariff.

Answer = C

“Demand and Supply Analysis: Introduction,” Richard V. Eastin and Gary L. Arbogast, CFA 2013 Modular Level I, Vol. 2, Reading 13, Sections 3.9, 3.10
“International Trade and Capital Flows,” Usha Nair-Reichert, PhD and Daniel Robert Witschi, PhD, CFA
2013 Modular Level I, Vol. 2, Reading 20, Sections 3.1, Exhibit 12
Study Session 4–13–i, j, 6–20–e
Calculate and interpret consumer surplus, producer surplus, and total surplus.
Analyze the effects of government regulation and intervention on demand and supply.

B. lends foreign currencies on a temporary basis to address balance of payment issues. C. stands ready to lend foreign currencies to member countries during periods of significant external deficits.

Answer = A

If the investor shorts BRL500,000 he will achieve a risk-free arbitrage profit (in BRL) closest to:

Sf/d = Spot rate: number of units of foreign currency (price currency) per one unit of domestic currency
Ff/d = Forward rate: number of units of foreign currency (price currency) per one unit of domestic currency
id = Domestic interest rate
if = Foreign interest rate
The arbitrage profit is the right side of the equation minus the left side.

Qd sp = Quantity demanded in number of units
Qs sp = Quantity supplied in number of units
Psp = Price per smart phone in $
I = Household income in $ per year
W = Wage rate in $ per hour

B is correct. Market equilibrium occurs when quantity demanded is equal to quantity supplied, so set
Qd sp = Qs sp after inserting the given values for I and W. Next, solve for Psp:

1,000 – 20Psp+ 2(9,500) = –200 + 50Psp– 80(10)
– 20Psp – 50Psp = – 200 – 800 – 1,000 – 19,000
–70Psp = – 21,000; Psp = – 21,000/–70 = $300.

Determine and describe breakeven and shutdown points of production.

C is correct. A firm in a perfectly competitive environment with total costs equal to total revenue and marginal costs greater than marginal revenue is operating at the upper breakeven point. Therefore, it should decrease the level of production to enter profit territory.

Using the consumption basket for August 2011, the Paasche index is closest to:

44.Which of the following is most consistent with real business cycle (RBC) models? The arguments and recommendations of RBC models suggest that:

A. monetary variables have a major impact on GDP growth.

Questions 45 through 68 relate to Financial Statement Analysis

45.The current ratio for an industry is 3.2. Data for a firm in the industry is presented below:

C. more liquid.

Answer = B

A. increased the prices of its product significantly.

B.decided to make greater use of long-term borrowing capacity.

Explain the effects of barriers to entry, industry concentration, industry capacity, and market share stability on pricing power and return on capital.

A is correct.

“Financial Reporting Mechanics,” Thomas R. Robinson, CFA, Jan Hendrik van Greuning, CFA, Karen O’Connor Rubsam, CFA, Elaine Henry, CFA, and Michael A. Broihahn, CFA
2013 Modular Level I, Vol.3, Reading 23, Section 5.1

“Understanding Cash Flow Statements,” Elaine Henry, CFA, Thomas R. Robinson, CFA, Jan Hendrik van Greuning, CFA, and Michael A. Broihahn, CFA
2013 Modular Level I, Vol.3, Reading 27, Section 3.1, 3.2.5
Study Session 7–23–-e, 8–27–e
Explain the relationships among the income statement, balance sheet, statement of cash flows, and statement of owners’ equity.

A.1,850.
B.2,050.
C.2,300.

Answer = B

“Financial Statement Analysis: An Introduction,” Elaine Henry, CFA, and Thomas R. Robinson, CFA
2013 Modular Level I, Vol. 3, Reading 22, Section 4.2, 4.3
Study Session 7–22–f
Describe the steps in the financial statement analysis framework.

A is correct. Analyzing the prospects of the industry would be done in the collect data phase of a financial analysis.

B is correct. The annual report is not a requirement of the SEC.

51.An analyst is forecasting gross profit of the three following companies. He uses the five-year average gross margins and forecasts sales using an internal model.

A. 1.
B. 2.

C. 3.

The depreciation expense for the first year computed under IFRS compared with under U.S. GAAP will most likely be:

A. the same.

C is correct. Dividends received can be classified as either an operating or investing activity under IFRS, but can only be classified as an operating activity under U.S. GAAP.

54.The following selected data are available for a firm:

If the firm’s tax rate is 40%, the free cash flow to the firm (FCFF) is closest to:

Calculate FCFF:

55.The following financial data is available for a company:

The company’s sustainable growth rate is closest to:

A. 4.00%.
B. 4.40%.
C. 4.78%.

56.During a period of rising inventory costs, a company decides to change its inventory method from FIFO to the weighted average cost method. Which of the following financial ratios will most likely increase as a result of this change?

A. Current
B. Debt-to-equity
C. Number of days in inventory

A. proxy statement.

B. notes to the financial statements.
C. management discussion and analysis.

Total liabilities at the end of the year are closest to:

Explain the relationships among the income statement, balance sheet, statement of cash flows, and statement of owners’ equity.

B is correct.

“Financial Reporting Standards,” Elaine Henry, CFA, Jan Hendrik van Greuning, CFA, and Thomas R. Robinson, CFA
2013 Modular Level I, Vol. 3, Reading 24, Section 5.2
Study Session 7-24-d
Describe the International Accounting Standards Board’s conceptual framework, including the objective and qualitative characteristics of financial statements, required reporting elements, and constraints and assumptions in preparing financial statements.

C is correct. Relevance and faithful representation are the two fundamental qualitative characteristics that make financial information useful according to the IASB Conceptual Framework.

“Understanding Balance Sheets," Elaine Henry, CFA and Thomas R. Robinson, CFA 2013 Modular Level 1, Vol.3, Reading 26, Section 2.2, 2.3, 4.3,
Study Session: 8-26- c, e
Describe alternative formats of balance sheet presentation.

Describe different types of assets and liabilities and the measurement bases of each.

On the 2012 statement of cash flows, the company’s net cash flow from investing activities (in $‘000s) is closest to:

62. Selected information for a company is provided below.

The company’s cash conversion cycle (in days) is closest to:

B is correct.

Cash conversion cycle = Days sales outstanding + Days of inventory on hand – Days of payables

Cash conversion cycle = DSO + DOH – Days in Payables = 48 + 90 – 18 = 120 days

B. higher.

C. the same.

64. A company, which prepares its financial statements according to IFRS, owns several investment properties on which it earns rental income. It values the properties using the fair value model based on prevailing rental markets. After two years of increases the market softened in 2012 and values decreased. A summary of the properties’ valuations is as follows:

Which of the following best describes the impact of the revaluation on the 2012 financial statements?

A.€6.5 million charge to net income
B.€6.5 million charge to revaluation surplus
C.€4.5 million charge to revaluation surplus and €2.0 million charge to net income

A is correct. For investment properties, when using the fair value model of revaluing assets, all increases and decreases affect net income.

65. Which of the following statements most accurately describes a valuation allowance for deferred taxes? A valuation allowance is required under:

“Income Taxes,” Elbie Antonites, CFA and Michael A. Broihahn, CFA
2013 Modular Level 1, Vol. 3, Reading 31, Section 6.1
Study Session, 9-31-g
Describe the valuation allowance for deferred tax assets—when it is required and what impact it has on financial statements.

B is correct. A valuation allowance is required under U.S. GAAP if there is doubt about whether a deferred tax asset will be recovered. Under IFRS the deferred tax asset is written down directly.

Answer = B

“Financial Reporting Quality: Red Flags and Accounting Warning Signs,”Thomas R. Robinson, CFA and Paul Munter
2013 Modular Level 1, Vol. 3, Reading 33, Section 3
Study Session: 10-33-d
Describe common accounting warning signs and methods for detecting each.

The forecasted net income (in ‘000s) for 2012 is closest to:

A. $169.
B. $202.
C. $244.

(25) 0.05 x 500 average debt

A. a lower cash flow per share in that period.

B. a higher earnings per share in future periods. C. the same free cash flow to the firm in that period.

A.both projects.
B.Project A only.
C.Project B only.

Answer = B

Explain the NPV profile, compare NPV and IRR methods when evaluating independent and mutually-exclusive projects, and describe the problems associated with each of the evaluation methods.

The NPV of project A is €1,780.59

B.decrease.

C.remain unchanged.

If the tax rate increases, then the bracketed term (1 – tax rate) decreases making the equity beta decrease because the asset beta is unchanged.

Answer = B

“Dividends and Share Repurchases: Basics,” George H. Troughton, CFA and Gregory Noronha, CFA
2013 Modular Level I, Vol.4, Reading 39, Section 3.1, 3.2, 3.3.

B.decrease.

C.remain unchanged.

73. Which is most likely considered a “pull” on liquidity?

A.Obsolete inventory
B.Reduction in a line of credit
C.Increased difficulty in collecting receivables

74. Based on best practices in corporate governance procedures, independent board members most likely:

A.meet only in the presence of management.

B is correct. Under best practices in corporate governance procedures, independent board members should have a “lead” director when the board chair is not independent.

75. The unit contribution margin for a product is $12. Assuming fixed costs of $12,000, interest costs of $3,000, and a tax rate of 40%, the operating breakeven point (in units) is closest to:

B is correct. The operating breakeven point is:

76. The effective annualized cost (%) of a banker’s acceptance that has an all-inclusive annual rate of 5.25% for a one-month loan of $2,000,000 is closest to:

)

77. Which of the following is most consistent with the best practices of corporate governance?

Study Session 11-41-a, b
Define corporate governance.

Describe practices related to board and committee independence, experience, compensation, external consultants, and frequency of elections, and determine whether they are supportive of shareowner protection.

C.statements made by the company’s management regarding capital structure policy.

Answer = B

A. act to level the playing field for market participants.

B. help define minimum standards of practice for agents.

80. A company has initiated the process of selling unproductive land representing 5% of its total assets and using the proceeds to buy back its common shares. Holding other factors constant, these actions by the company will most likely result in a:

A. higher return on equity.
B. higher operating margin.
C. lower sustainable growth.

Calculate and interpret ratios used in equity analysis, credit analysis, and segment analysis. Describe the elements that should be covered in a thorough company analysis.

A is correct. Selling unproductive land and using the proceeds from the sale to buy back shares reduces the total assets. Holding sales constant the decrease in assets would improve the asset turnover. Buying back shares increases the firm’s financial leverage. Both the increase in asset turnover and financial leverage will lead to a higher return on equity.

“Equity Valuation: Concepts and Basic Tools,” John J. Nagorniak, CFA and Stephen E. Wilcox, CFA 2013 Modular Level I, Vol. 5, Reading 51, Section 4
Study Session 14-51-c
Explain the rationale for using present-value of cash flow models to value equity and describe the dividend discount and free-cash-flow-to-equity models.

A is correct. FCFE is a measure of the firm’s dividend paying capacity.

Answer = A

“Introduction to Industry and Company Analysis,” Patrick W. Dorsey, CFA, Anthony M. Fiore, CFA and Ian Rossa O’Reilly, CFA
2013 Modular Level I, Vol. 5, Reading 50, Section 6.1
“Equity Valuation: Concepts and Basic Tools,” John J. Nagorniak, CFA and Stephen E. Wilcox, CFA 2013 Modular Level I, Vol. 5, Reading 51, Section 4.3, Example 8
Study Session 14-50-k, 14-51-e
Describe the elements that should be covered in a thorough company analysis.

83. A trader buys 500 shares of a stock on margin at $36 a share using an initial leverage ratio of 1.66. The maintenance margin requirement for the position is 30 percent. The stock price at which the margin call will occur is closest to:

A. $20.57.
B. $25.20.
C. $30.86.

84. Which of the following financial intermediaries are most likely to provide liquidity service to their clients?

A. Dealers
B. Brokers
C. Exchanges

A. $49.49.
B. $49.84.
C. $49.94.

Answer = B

A. security prices that reflect fundamental values.

B. the use of resources where they are most valuable.

87. An investor gathers the following information for an index:

“Security Market Indices,” Paul D. Kaplan, CFA, and Dorothy C. Kelly, CFA.

2013 Modular Level I, Vol. 5, Reading 47, Section 2
Study Session 13-47-b
Calculate and interpret the value, price return, and total return of an index.

Answer = B

“Market Efficiency,” W. Sean Cleary, CFA, Howard J. Atkinson, CFA, and Pamela Peterson Drake, CFA.

Answer = C

“Overview of Equity Securities” Ryan C. Fuhrmann, CFA, and Asjeet S. Lamba, CFA
2013 Modular Level I, Vol. 5, Reading 49, Section 7.1
“Equity Valuation: Concepts and Basic Tools” John J. Nagorniak, CFA, and Stephen E. Wilcox, CFA 2013 Modular Level I, Vol. 5, Reading 51, Section 4.2
Study Session 14-49-g, 14-51-e
Distinguish between the market value and book value of equity securities.

90. An investor gathers the following data about a company:

The company’s justified forward P/E is closest to:

A. 10.0.
B. 13.3.
C. 20.0.

Justified forward P/E: P0/E1 = p / (r – g)
p = payout ratio = 40% (given);
r = required rate of return = 12% (given)
g = (1 – Dividend payout ratio) × ROE = (1- 0.40) × 15 = 9% P0/E1 = p / (r – g) = 0.40 / (0.12 – 0.09) = 13.3x

Alternatively:
Justified forward P/E: P0/E1 = (D1 / E1) / (r – g)
g = (1 – Dividend payout ratio) × ROE = (1- 0.40) × 15 = 9%
D1 = $1.47 x 1.09 = 1.60; E1 = $4.00 (given); r = required rate of return = 12% (given) P0/E1 = (D1 / E1) / (r – g) = (1.60 / 4.00) / (0.12 – 0.09) = 13.3x

Answer = A

“Derivative Markets and Instruments,” Don M. Chance, CFA
2013 Modular Level I, Vol. 6, Reading 60, Section 2.1
Study Session 17-60-c
Define forward contracts, futures contracts, options (calls and puts), and swaps and compare their basic characteristics.

B.receive EUR 4,312,500 from the dealer.
C.receive EUR 5,000,000 from the dealer.

Answer = C

Answer = A

“Futures Markets and Contracts,” Don M. Chance, CFA
2013 Modular Level I, Vol. 6, Reading 62, Section 3
Study Session 17-62-d
Describe price limits and the process of marking to market, and calculate and interpret the margin balance, given the previous day’s balance and the change in the futures price.

C.Yes, if it pays a high enough dividend.

Answer = C

Answer = B

“Swap Markets and Contracts,” Don M. Chance, CFA
2013 Modular Level I, Vol. 6, Reading 64, Section 3.1
Study Session 17-64-b
Describe, calculate, and interpret the payments of currency swaps, plain vanilla interest rate swaps, and equity swaps.

“Risk Management Applications of Option Strategies,” Don M. Chance, CFA
2013 Modular Level I, Vol. 6, Reading 65, Section 2.1
Study Session 17-65-a
Determine the value at expiration, profit, maximum profit, maximum loss, breakeven underlying price at expiration, and payoff graph of the strategies of buying and selling calls and puts, and determine the potential outcomes for investors using these strategies.

C is correct because buying a call gives the owner the right to buy the stock at the exercise price. The investor predicts that the stock will increase to $95 at the end of two months. He will likely be able to sell his calls for at least $7 and realize a profit.

C.has a sinking fund provision.

Answer = C

B.assumes all the bonds have the same discount rate. C.ignores differences in coupon rates across the bonds.

Answer = A

A.Both investors will choose the taxable bond.

B.Both investors will choose the tax-exempt bond.

100. The yield on a U.S. Treasury STRIPS security is also known as the Treasury:

A.spot rate.

101. Consider a 5-year option-free bond that is priced at a discount to par value. Assuming the discount rate does not change, one year from now the value of the bond will most likely:

A.increase.

A is correct because the bond is priced below its par value but will be worth exactly par value at maturity. Over time, assuming a stable discount rate, the value of the bond must rise so that it is equal to par at maturity.

102. The market value of an 18-year zero-coupon bond with a maturity value of $1,000 discounted at a 12% annual interest rate with semi-annual compounding is closest to:

C.security has a bullet maturity rather than an amortizing structure.

Answer = B

A.0.74%.
B.1.48%.
C.2.06%.

Answer = B

A.increases measurement accuracy.

B.is easier to model than scenario analysis.

106. An analyst uses a valuation model to estimate the value of an option-free bond at 92.733 to yield 11%. If the value is 94.474 for a 60 basis point decrease in yield and 91.041 for a 60 basis point increase in yield, the effective duration of the bond is closest to:

A.1.85.
B.3.09.
C.6.17.

A.put the issue.

B.call the issue.

108. The bonds issued by ALS Corp. are currently priced at 108.00 and are option free. Based on a portfolio manager’s valuation model, a 10 basis points rise in interest rates will result in the bond price falling to 106.50 while a 10 basis points fall in interest rates will result in the bond price rising to 110.00. The market value of the portfolio manager’s holdings of ALS bonds is $2 million. The expected change in the market value of this holding for a 100 basis point change in interest rates will be closest to:

A.$124,000.
B.$322,600.
C.$645,200.

The approximate percent change in the value of the holdings (the dollar duration) is: 0.1613 × 2,000,000 = $322,600.

Questions 109 through 114 relate to Alternative Investments.

“Introduction to Alternative Investments,” Terri Duhon, George Spentzos, CFA, and Scott D.

Stewart, CFA
2013 Modular Level I, Vol. 6, Reading 66, Sections 2.1 Study Session 18-66-b
Describe categories of alternative investments.

C. convenience yield.

Answer = B

C. reduce exposure to inflation.

Answer = C

A. assets are not marked to market.

B. data are subject to survivorship bias.

C is correct. Since commodity indices are constructed using commodity futures and not the underlying commodities there can be differences between commodity index returns and the returns of the underlying commodities.

113. Which of the following investments most likely provides an investor with indirect, equity exposure to real estate?

“Introduction to Alternative Investments,” Terri Duhon, George Spentzos, CFA, and Scott D.

Stewart, CFA
2013 Modular Level I, Vol. 6, Reading 66, Sections 5.1, 5.2 Study Session 18-66-d

exposure. Real estate investment partnerships are a form of direct real estate equity investment.

Commercial mortgage backed securities (CMBS) provides investors with indirect, debt investment

Answer = A

“Introduction to Alternative Investments,” Terri Duhon, George Spentzos, CFA, and Scott D.

The incentive fee = ($541,500,000 - $475,000,000) × 0.10 = $6,650,000

Total fees = $14,772,500

Answer = A

"Portfolio Management: An Overview” by Robert M. Conroy, CFA and Alistair Byrne, CFA Modular Level I, Vol. 4, Reading 42, Section 3 (Exhibit 14)

The 2012 return needed to achieve a trailing five year geometric mean annualized return of 5.0% when calculated at the end of 2012 is closest to:

Holding period total return (cumulative) factor calculation through 2011:
(1-0.348)×(1+0.322)×(1+0.111)×(1-0.014) = 0.652 × 1.322 × 1.111 × 0.986 = 0.9442 Compound total return (cumulative) factor at 5% per year of five percent for five years: 1.055 = 1.2763
Return needed in 2012 to achieve a compound annualized return of 5%
1.2763/.9442 = 1.3517 = 35.2 percent
Check: 0.944 × 1.352 = 1.276(1/5) = 1.050 = 5 percent annualized

117. Consider a portfolio with two assets. Asset A comprises 25% of the portfolio and has a standard deviation of 17.9%. Asset B comprises 75% of the portfolio and has a standard deviation of 6.2%. If the correlation of these two investments is 0.5, the portfolio standard deviation is closest to:

A. 1.02.
B. 1.05.
C. 1.16

Answer = B

A. M-squared
B. Sharpe ratio
C. Treynor ratio

Answer = C

A. low ability to take risk, but a high willingness to take risk B. high ability to take risk, but a low willingness to take risk C. high ability to take risk and a high willingness to take risk

Answer = C

2012 Level I Mock Exam: Morning Session

The morning session of the 2012 Level I Chartered Financial Analyst (CFA®) Mock Examination has 120

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

“Code of Ethics and Standards of Professional Conduct,” CFA Institute
2012 Modular Level I, Vol. 1, p. 8
Study Session 1-1-a
Describe the structure of the CFA Institute Professional Conduct Program and the process for the enforcement of the Code and Standards.

C is correct because the two principles of the Rules of Procedure for Proceedings Related to Professional Conduct are confidentiality of proceedings and fair process to the member and candidate.

B is correct because a composite must include all actual, fee-paying, discretionary portfolios managed in accordance with the same investment mandate, objective, or strategy (Standards IV Composites).

By including both value and growth portfolios, the composite is made up of portfolios with different investment mandates or strategies.

Answer = A

“Guidance for Standards I–VII,” CFA Institute
2012 Modular Level I, Vol. 1, pp. 123–125
Study Session 1-2-c
Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.

“Guidance for Standards I–VII,” CFA Institute
2012 Modular Level I, Vol. 1, pp. 78–80
Study Session 1-2-b
Distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards.

B is correct because the client is the trust/trustees, not the beneficiary. Mawar followed Standard III (C) Suitability by managing the trust assets in a way that would likely result in a

Answer = C

“Guidance for Standards I–VII,” CFA Institute
2012 Modular Level I, Vol. 1, pp. 46–47, 90–91, 144–146
Study Session 1-2-a, b
Demonstrate and explain the application of the Code of Ethics and Standards of Professional Conduct to situations involving issues of professional integrity.

Answer = B

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

Answer = A

CFA Institute Standards
2012 Modular Level I, Vol. 1, pp. 101–102
Study Session 1-2-c
Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.

B.disclosure of conflicts.

C.independence and objectivity.

A.Nonpayment of CFA Institute membership dues
B.Attributing her superior returns to participation in the CFA Program
C.Indicating that being a CFA charterholder has enhanced her portfolio management skills

Answer = B

A.A multi-national financial services holding company
B.An investment management division of a regional commercial bank
C.A locally incorporated subsidiary undertaking investment management services

Answer = A

B.fee- and non-fee-paying discretionary accounts.

C.fee- and non-fee-paying discretionary and non-discretionary accounts.

12. In countries where new local laws relating to calculation and presentation of investment performance conflict with GIPS standards, firms who have claimed GIPS compliance should most likely:

A.stop claiming GIPS compliance.

13. Firms claiming GIPS compliance must make every reasonable effort to provide a compliant presentation to which of the following?

A.Existing clients
B.Prospective clients
C.Both existing and prospective clients

14. James Simone, CFA, the CFO of a publicly listed company, seeks to improve the quality of his company’s communication with institutional fund managers. He holds an investor briefing with this group the evening before the company earnings are announced. The company’s quarterly earnings are broadcast in a press release the next day before the market opens. The earnings information in the investor briefing is identical to that in the press release. Did Simone most likely violate the CFA Institute Standards of Professional Conduct?

A.Yes
B.No, because investor briefing and press release information are identical C.No, because the company releases information while the market is closed

A.No
B.Yes, she did not disclose her potential conflicts of interest to either client.

C.Yes, she profited on the real estate to the detriment of her financially stressed client.

16. Prudence Charmaine, a CFA charterholder, was recently accused in writing of cheating on a professional accounting exam. She denied cheating and successfully defended herself against the allegation. As part of her defense and as evidence of her character, Charmaine stated she is a CFA charterholder and upholds the CFA Institute Code of Ethics and Standards of Professional Conduct. On her next annual Professional Conduct Statement, Charmaine does not report this allegation to CFA Institute. Did Charmaine most likely violate the CFA Institute Code of Ethics or Standards of Professional Conduct?

A.No
B.Yes, she improperly used the CFA Institute Code and Standards to defend herself. C.Yes, she did not report the allegation on her annual Professional Conduct Statement.

17. Margie Germainne, CFA, is a risk management consultant who has been asked by a small investment bank to recommend policies to prevent bank employees from front running client orders. These clients generally invest in one or more of the bank’s large cap equity unit trusts.

To ensure compliance with the CFA Institute Standards of Professional Conduct, Germainne should least likely recommend which of the following? Employees should be restricted from trading:

“Guidance for Standards I–VII,” CFA Institute
2012 Modular Level I, Vol. 1, pp. 54, 131–134
Study Session 1-2-c
Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.

A is correct because while Standard VI (B) Priority of Transactions is designed to prevent any potential conflict of interest or the appearance of a conflict of interest with respect to personal transactions, it does not ban employees from trading securities. A ban on all equity related securities could be excessively restrictive to employees and unnecessary if appropriate personal transaction policies and procedures are in place.

C is correct because the Standards require the disclosure of conflicts (Standard VI (A)). For Meir to understand what potential conflicts of interest employees may have with the firm and with their clients, he would need to know the outside interests of each staff member. The staff

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

Answer = C

“The Time Value of Money,” Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
2012 Modular Level I, Vol. 1, pp. 266–267
Study Session 2-5-c
Calculate and interpret the effective annual rate, given the stated annual interest rate and the frequency of compounding.

“Statistical Concepts and Market Returns,” Richard A. DeFusco, Dennis W. McLeavey, Jerald E.

Pinto, and David E. Runkle
2012 Modular Level I, Vol. 1, p. 399
Study Session 2-7-j, k
Explain skewness and the meaning of a positively or negatively skewed return distribution. Describe the relative locations of the mean, median, and mode for a unimodal, nonsymmetrical distribution.

Calculate and interpret the results using each of the following methods to evaluate a single capital project: net present value (NPV), internal rate of return (IRR), payback period, discounted payback period, and profitability index (PI).

C is correct. Enter the given cash flows into a financial calculator and solve for IRR. CF0 = –12,500, CF1 = 2,000, CF2 = 4,000, CF3 = 5,000, CF4 = 2,000, CF5 = 1,000, and CF6 = 500. Compute i.

return across the period is closest to:

23. The following sample of 10 items is selected from a population. The population variance is unknown.

The standard error of the sample mean is closest to:

“Sampling and Estimation,” Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
2012 Modular Level I, Vol. 1, p. 557
Study Session 3-10-f
Calculate and interpret the standard error of the sample mean.

A is correct. When the population variance is unknown, the standard error of the sample meanis

s2 = [(10 – 3.6)2 + (20 – 3.6)2 + (–8 – 3.6)2 + (2 – 3.6)2 + (–9 – 3.6)2 + (5 – 3.6)2 + (0 – 3.6)2 + (–8 – 3.6)2 + (3 – 3.6)2 + (21 – 3.6)2] ÷ 9 = 117.6 and s = 10.844.

The standard error of the sample mean is, therefore, 10.844 ÷ 100.5 = 3.429.

C.conditional distribution.

Answer = A

25. An analyst collects data relating to five commonly used measures of use of debt (leverage) and interest coverage for a randomly chosen sample of 300 firms. The data comes from those firms’ fiscal year 2011 annual reports. This data is best characterized as:

A.time-series data.

C is correct. Data on some characteristics of companies at a single point in time are cross-sectional data.

26. A financial contract offers to pay €1,200 per month for five years with the first payment made today. Assuming an annual discount rate of 6.5%, compounded monthly, the present value of the contract is closest to:

Calculate and interpret the future value (FV) and present value (PV) of a single sum of money, an ordinary annuity, an annuity due, a perpetuity (PV only), and a series of unequal cash flows.

B is correct. Enter the following into a financial calculator:
number of periods (5 × 12), N= 60; the discount rate, I/Y= (6.5/12) = 0.54166667; payment, PMT = 1,200.

27. A two-tailed t-test of the null hypothesis that the population mean differs from zero has a p- value of 0.0275. Using a significance level of 5%, the most appropriateconclusion is:

A.reject the null hypothesis.

Runkle
2012 Modular Level I, Vol. 1, pp. 599–600
Study Session 3-11-e
Explain and interpret the p-value as it relates to hypothesis testing.

A is correct. The p-value is the smallest level of significance at which the null hypothesis can be rejected. In this case, the given p-value is less than the given level of significance and we reject the null hypothesis.

The t-statistic to test the hypothesis that the mean difference is equal to zero is closest to:

A.0.23.
B.0.27.
C.0.52.

𝑑 = 1 𝑛 � 𝑑𝑖

Then, calculate the sample variance and the standard error of the mean difference:

In this case, the mean difference is 1.4. The sample variance is 36.8. The standard error of the mean difference is 2.712932. The t-statistic is 0.51605.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

A.£2,525.
B.£2,542.
C.£2,854.

Answer = B

B is correct. The future value of a given lump sum, calculated using continuous compounding, is FV = PV × ert. In this case, 2000 × e.06×4 = 2,542.

30. A graphic depiction of a continuous distribution that shows the left tail to be longer than the right tail is best described as having:

Answer = C

“Statistical Concepts and Market Returns,” Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
2012 Modular Level I, Vol. 1, p. 401
Study Session 2-7-j
Explain skewness and the meaning of a positively or negatively skewed return distribution.

“Sampling and Estimation,” Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
2012 Modular Level I, Vol. 1, pp. 562–566
Study Session 3-10-h, i
Distinguish between a point estimate and a confidence interval estimate of a population parameter.

Describe the properties of Student’s t-distribution and calculate and interpret its degrees of freedom.

The median value of the items is:

A.3.
B.4.
C.5.

Questions 33 through 44 relate to Economics

33. Demand for a good is most likely to be more elastic when:

C is correct. The longer the time that has elapsed since a price change, the more elastic demand is. For example, if gas prices rise, consumers cannot quickly change their mode of transportation

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The marginal revenue product ($ per worker) for hiring the fifth and sixth workers is closest to:

A.14.
B.21.
C.42.

B is correct. The marginal product (MP) is the amount of additional output resulting from using one more unit of input: ΔTP/ΔL, where ΔTP is the change in total product and ΔL is the change in total labor. The marginal revenue product (MRP) is the marginal product of an input times the price of the product: MP × Price = ΔTP/ΔL × Price.

In this problem, the marginal product of hiring the 5th and 6th workers (ΔL = 2) is 14 shirts per hour/2 workers = 7 shirts per hour/worker. With each shirt resulting in $3 of revenue, the MRP is 7 shirts per hour/worker × $3/shirt = $21 per worker.

Answer = C

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A.Increasing reserve requirements
B.Selling securities on the open market
C.Purchasing securities on the open market

Answer = C

A.increase.

B.decrease.

A is correct. Aggregate demand rises when the government increases spending by the same amount as it raises taxes because the marginal propensity to spend out of disposable income is less than 1, and hence for every dollar less in disposable income, spending only falls by c (where c is the marginal propensity to consume in dollars). Aggregate spending will fall less than the tax rise by a factor c. This additional output will, in turn, lead to further increases in income and output through the multiplier effect.

38. In early 2011, a New Zealand traveler returned from Singapore with SGD7,500 (Singapore dollars). A foreign exchange dealer provided the traveler with the following quotes:

B is correct. The NZD/SGD cross-rate is NZD/USD × USD/SGD = 0.7670 × 1.26 = 0.9664. The traveler will receive 0.9664 NZD per SGD; 0.9664 NZD/SGD × 7,500 SGD = 7,248 NZD.

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If the real interest rate is 3% and government spending increases to 2,000, the increase in aggregate income will be closest to:

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A is correct. Normal profitis the level of accounting profit needed to just cover the implicit opportunity costs ignored in accounting costs. This is all that a firm needs to earn in the long run to remain in business. Failing to earn normal profits over the long run has a debilitating impact on the firm’s ability to access capital and to function properly as a business enterprise.

41. A small country has a comparative advantage in the production of pencils. The government establishes an export subsidy for pencils to promote economic growth. Which of the following will be the most likely result of this policy?

“International Trade and Capital Flows,” Usha Nair-Reichert and Daniel Robert Witschi 2012 Modular Level I, Vol. 2, pp. 456–457
Study Session 6-20-d
Compare types of trade and capital restrictions and their economic implications.

C is correct. Export subsidies interfere with the functioning of the free market and result in a deadweight loss to society. The deadweight loss arises on the producer side as the higher subsidized price causes inefficient producers to remain in the market; on the consumer side, the higher price causes those that would have purchased at the lower price to be shut out of the market.

Answer = B

“International Trade and Capital Flows,” Usha Nair-Reichert and Daniel Robert Witschi 2012 Modular Level I, Vol. 2, pp. 452–456
Study Session 6-20-d
Compare types of trade and capital restrictions and their economic implications.

C.adjusting interest rates to stimulate higher domestic savings.

Answer = A

44. In the classification of currency regimes, a currency board system (CBS) most likely differs from a fixed-rate parity system in that:

A.a CBS has a discretionary target level of foreign exchange reserves.

C is correct. In a CBS, the monetary authority has an obligation to maintain 100% foreign currency reserves against the monetary base. It thus cannot lend to troubled financial institutions. As long as the country under a fixed-parity regime maintains its exchange peg, the central bank can serve as a lender of last resort.

Questions 45 through 68 relate to Financial Statement Analysis

“Financial Statement Analysis: An Introduction,” Elaine Henry and Thomas R. Robinson 2012 Modular Level I, Vol. 3, pp. 28–31
Study Session 7-22-d
Describe the objective of audits of financial statements, the types of audit reports, and the importance of effective internal controls.

B is correct. For a publicly traded firm in the United States, the auditor must express an opinion as to whether the company’s internal control system is in accordance with the Public Company Accounting Oversight Board, under the Sarbanes–Oxley Act. This is done either as a final paragraph in the auditor’s report or as a separate opinion.

“Financial Reporting Mechanics,” Thomas R. Robinson, Jan Hendrik van Greuning, Karen O’Connor Rubsam, Elaine Henry, and Michael A. Broihahn
2012 Modular Level I, Vol. 3, pp. 71–73
Study Session 7-23-d
Explain the need for accruals and other adjustments in preparing financial statements.

A is correct. The adjusting entry to record the expiry of a prepaid expense is the reduction of an asset (the prepaid) and the recognition of the expense.

Analyze balance sheets and statements of changes in equity.

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presented below.

Current Assets

Current Liabilities

Accounts payable

The cash collected from customers in 2011 is closest to:

A is correct. Cash collected from customers = Revenues – Increase in accounts receivable= $100 – (25 – 13.5) = 88.5.

49. Selected information for a company and the common size data for its industry are provided below.

Which of the following is most likely a contributor to the company’s inferior ROE compared to that of the industry? The company’s:

A.tax burden ratio.

Demonstrate the application of the DuPont analysis of the return on equity, and calculate and interpret the effect of changes in its components.

C is correct.

financial statements within the IFRS Conceptual Framework?

A.Matching
B.Materiality
C.Accrual basis

A is correct. The IFRS Conceptual Framework specifies a number of general features underlying the preparation of financial statements, including materiality and accrual basis. Matching is not one of those general features; it is a general principle of expense recognition.

51. A company suffered a substantial loss when its production facility was destroyed in an earthquake against which it was not insured. Geological scientists were surprised by the earthquake as there was no evidence that one had ever occurred in that area in the past. Which of the following statements is most accurate? The company should report the loss on its income statement:

“Understanding Income Statements,” Elaine Henry and Thomas R. Robinson
2012 Modular Level I, Vol. 3, pp. 182–183
Study Session 8-25-e
Describe the financial reporting treatment and analysis of non-recurring items (including discontinued operations, extraordinary items, and unusual or infrequent items) and changes in accounting standards.

A is correct. To qualify as an extraordinary item, an item must be both unusual in nature and infrequent in occurrence: The description of the earthquake meets these criteria. Extraordinary items are only allowed under U.S. GAAP and are reported on the income statement net of tax.

A.$1,000.
B.$1,050.
C.$1,250.

Answer = B

tax payable [or current income tax expense] and representing an increase in the expense). Therefore, the income tax expense = 1,000 + 50 = 1,050.

53. Which of the following inventory valuation methods best matches the actual historical cost of the inventory items to their physical flow?

54. A company has announced that it is going to distribute a group of long-lived assets to its owners in a spin-off. The most appropriate way to account for the assets until the distribution occurs is to classify them as:

A.held for sale with no depreciation taken.

C is correct. Long-lived assets that will be disposed of other than by sale, such as a spin-off, an exchange for other assets, or abandonment, are classified as held for use until disposal and continue to be depreciated until that time.

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The pension expense (in thousands) reported in 2011 is closest to:

A.$1,525.
B.$2,217.
C.$2,253.

56. An analyst is assessing a company’s quality of earnings by looking at the cash flow earnings index (operating cash flow divided by net income). Potential problems would most likely be indicated if the ratio were consistently:

A.equal to 1.0.

“Financial Reporting Quality: Red Flags and Accounting Warning Signs,” Thomas R. Robinson and Paul Munter
2012 Modular Level I, Vol. 3, p. 594
Study Session 10-33-d
Describe common accounting warning signs and methods for detecting each.

B is correct. A cash flow earnings index consistently below 1.0 could indicate potential problems in a company’s quality of earnings.

After adjustment for the off-balance-sheet financing, the debt-to-total-assets ratio for the company is closest to:

Explain appropriate analyst adjustments to a company’s financial statements to facilitate comparison with another company.

A is correct. The present value of the operating leases should be added to both the total debt and the total assets.

B.financial position.

C.comprehensive income.

A.verifiability.

B.comparability.

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A is correct. Under the International Accounting Standards Board’s Conceptual Framework, verifiability is the qualitative characteristic that means that different knowledgeable and independent users would agree that the information presented faithfully represents the economic events that it is intended to represent.

Contrast cash flow statements prepared under International Financial Reporting Standards (IFRS) and U.S generally accepted accounting principles (U.S. GAAP).

A is correct. Interest paid must be categorized as an operating cash flow activity under U.S. GAAP, although it can be categorized as either an operating or financing cash flow activity under IFRS.

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Answer = A

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A.4.8%.

B.15.2%.
C.22.7%.

B.Costs can be reliably measured.

C.Goods have been delivered to the customer.

64. A company entered into a three-year construction project with a total contract price of $10.6 million and an expected total cost of $8.8 million. The following table provides cash flow information relating to the contract:

“Understanding Income Statements,” Elaine Henry and Thomas R. Robinson

2012 Modular Level I, Vol. 3, pp. 162–164
Study Session 8-25-b
Describe the general principles of revenue recognition and accrual accounting, specific revenue recognition applications (including accounting for long-term contracts, installment sales, barter transactions, and gross and net reporting of revenue), and the implications of revenue recognition principles for financial analysis.

• €2.0 million for repairs to the building’s roof and windows
• €0.5 million to modify the interior layout to meet their needs (moving walls and doors, inserting and removing partitions, etc.)
• €0.1 million on an orientation and training session for employees to familiarize them with the facility

The cost to be capitalized to the building account (in millions) for accounting purposes is closest to:

Initial cost €35.00 Repairs to roof and windows 2.00 Modifications to interiors 0.50 Total cost €37.5 million

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Answer = C

“Non-Current (Long-Term) Liabilities,” Elizabeth A. Gordon and Elaine Henry 2012 Modular Level I, Vol. 3, pp. 537, 539–540, 544
Study Session 9-32-c
Explain the derecognition of debt.

The market value of debt at retirement can be determined by discounting the future cash flows at the current market rate (5%) using a financial calculator:
FV = 20,000,000; i = 5%; PMT = 1,200,000; N = 2; Compute PV = 20,371,882

Interest

B.the auditor’s report.

C.financial statement analysis.

68. Which of the following is most likely a reason that a lessor can offer attractive lease terms and lower cost financing to a lessee? Because the:

A.lessor retains the tax benefits of ownership.

A is correct. The lessor often retains the tax benefits of ownership of the leased asset, which allows the lessor to pass those savings along to the lessee in the form of lower financing costs or other attractive terms.

Questions 69 through 78 relate to Corporate Finance

B is correct. Financing costs are not included in a cash flow calculation but are considered in the calculation of the discount rate.

70. A company has an equity beta of 1.4 and is 60% funded with debt. Assuming a tax rate of 35%, the company’s asset beta is closest to:

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71. A company’s taxable income is 17.1% of sales. Assuming taxes of 42% and a dividend payout of 50%, the net profit margin is closest to:

Net profit margin = Net income ÷ Sales = [Earnings before tax × (1 – Tax rate)] ÷ Sales

(0.171 × Sales) × (1-0.42)
=
Sales
= 0.171 × (1 – 0.42) = 9.92%.

Answer = C

“Capital Budgeting,” John D. Stowe and Jacques R. Gagne
2012 Modular Level I, Vol. 4, p. 15
Study Session 11-36-d
Calculate and interpret the results using each of the following methods to evaluate a single capital project: net present value (NPV), internal rate of return (IRR), payback period, discounted payback period, and profitability index (PI).

C is correct.

DOL = (Revenues – Variable operating costs)
(Revenues – Variable operating costs – Fixed operating costs)

B.link compensation with long-term objectives.

C.include a representative from the firm’s external auditor.

• Bonds are priced at par and they have an annual coupon rate of 9.2% • Preferred stock is priced at $8.18 and it pays an annual dividend of $1.35 • Common equity has a beta of 1.3
• The risk-free rate is 4% and the market premium is 11%
• Capital structure: Debt = 30%; Preferred stock = 15%; Common equity = 55% • The tax rate is 35%

The weighted average cost of capital (WACC) for the company is closest to:

Describe how taxes affect the cost of capital from different capital sources. Calculate and interpret the expected return of an asset using the CAPM.

C is correct.

A.dividends.

B.long-term leases.

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Answer = A

“Cost of Capital,” Yves Courtois, Gene C. Lai, and Pamela Peterson Drake
2012 Modular Level I, Vol. 4, pp. 40–43
“Dividends and Share Repurchases: Basics,” George Troughton and Gregory Noronha 2012 Modular Level I, Vol. 4, pp. 142–143
Study Session 11-37-b, 11-39-d
Describe how taxes affect the cost of capital from different capital sources.

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 = $6,000,000 ÷ 4,000,000 = $1.50
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑦𝑖𝑒𝑙𝑑 = $1.50 ÷ $20.00 = 7.5%
If the after-tax cost of debt (10% × [1 – 40%] = 6%) is below the earnings yield, the earnings per share will increase. This can be derived from Example 7 on p. 142.

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A is correct. Note: The face value is greater than the purchase price because the T-bill sells at a discount.

𝐷𝐵𝑌 = $10,000 − $9,932.40
$10,000

Answer = C

“Market Organization and Structure,” Larry Harris 2012 Modular Level I, Vol. 5, pp. 51–53
Study Session 13-47-g, h

80. The type of voting in board elections that is most beneficial to shareholders with a small number of shares is best described as:

A.statutory voting.
B.voting by proxy.

C is correct. Cumulative voting allows shareholders to direct their total voting rights to specific candidates, as opposed to having to allocate their voting rights evenly among all candidates. Thus, applying all of the votes to one candidate provides the opportunity for a higher level of representation on the board than would be allowed under statutory voting.

81. An investor gathered the following data in order to estimate the value of the company's preferred stock:

The value of the company's preferred stock is closest to:

A is correct.

Answer = C

“Equity Valuation: Concepts and Basic Tools,” John J. Nagorniak and Stephen E. Wilcox 2012 Modular Level I, Vol. 5, pp. 276, 281, 289–291
Study Session 14-52-h
Calculate and interpret the following multiples: price to earnings, price to an estimate of operating cash flow, price to sales, and price to book value.

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83. An investor evaluating a company's common stock for investment has gathered the following data.

Using the two-stage dividend discount model, the value per share of this common stock in 2012 is closest to:

= $1.67 + $1.87 + $28.03 = $31.57.

84. Which of the following is least likely to be directly reflected in the returns on a commodity index?

B is correct. Commodity index returns reflect the changes in future prices and the roll yield. Changes in the underlying commodity spot prices are not reflected in a commodity index.

85. A trader who has bought a stock at $30 is concerned about a downside movement in the stock and would like to place an order that guarantees selling it at $25. Which of the following will most likely help the trader achieve her objective? (GTC = Good-till-cancelled)

C is correct. Option contracts can be viewed as limit orders for which execution is guaranteed at the strike price. Therefore, a “put buy” order at a strike price of 25 will guarantee selling the stock at 25.

86. A trader who buys a stock priced at $64 on margin with a leverage ratio of 2.5 and a maintenance margin of 30% will most likely receive a margin call when the stock price is at or falls just below:

C is correct.

87. Compared to its market-value-weighted counterpart, a fundamentally weighted index will least likely have a:

A.value tilt.

88. A U.S. institutional money manager prefers to invest in depository instruments of non-domestic equity securities that are privately placed in the U.S. and not subject to the foreign ownership and capital flow restrictions. The type of security that is most appropriate for this investor is:

A.global registered shares.

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B is correct. Global depository receipts (GDRs) meet the investor preferences. They are not subject to the foreign ownership and capital flow restrictions that may be imposed by the issuing company’s home country because they are sold outside of that country. GDRs cannot be listed on U.S. exchanges, but they can be privately placed with the institutional investors based in the United States.

Based on the above information, the analyst will most appropriately conclude that compared to the firms in Industry 2, those in Industry 1 would potentially have:

A.larger economic profits.

Explain effects of industry concentration, ease of entry, and capacity on return on invested capital and pricing power.

Describe the principles of strategic analysis of an industry.

B.experiencing a higher than the sustainable growth rate.

C.mature and relatively insensitive to the economic fluctuations.

91. Which of the following is least likely one of main purposes of derivative markets?

A.Reveal prices and volatility of the underlying assets
B.Improve market efficiency by lowering transaction costs C.Enable companies to more easily practice risk management

A.$30
B.$60
C.$70

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Answer = C

“Swap Markets and Contracts,” Don M. Chance
2011 Modular Level I, Vol. 6, pp. 144–147
Study Session 17-64-b
Describe, calculate, and interpret the payment of currency swaps, plain vanilla interest rate swaps, and equity swaps.

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94. Epsilon Inc., a U.S. based company, must pay ¥1,000,000,000 to its Japanese component supplier in 3 months. Epsilon approaches a dealer and enters into a USD/JPY currency forward contract, containing a stipulation for physical delivery, to manage the foreign exchange risk associated with the payment to its supplier. Which of these best describes Epsilon’s currency forward contract?

“Forward Markets and Contracts,” Don M. Chance
2011 Modular Level I, Vol. 6, pp. 43–44
Study Session 17-61-h
Describe the characteristics of currency forward contracts.

A is correct because this currency forward contract requires physical delivery; therefore, Epsilon receives 1,000,000,000 JPY from the dealer in exchange for paying USD.

A is correct because, for a European put, the exercise price must be adjusted to the present value because the option can only be exercised on expiration.

96. An investor purchases ABC stock at $71 per share and executes a protective put strategy. The put option used in the strategy has a strike price of $66, expires in two months, and is purchased for $1.45. At expiration, the protective put strategy breaks even when the price of ABC is closest to:

C is correct because to break even, the underlying stock must be at least as high as the amount expended up front to establish the position. To establish the protective put, the investor would have spent $71 + $1.45 = $72.45.

Questions 97 through 108 relate to Fixed Income Investments

C.deferred coupon bond.

Answer = B

A.zero.

B.related to the security’s coupon reset frequency. C.similar to an otherwise identical fixed-rate security.

A.arbitrage transaction.

B.balance sheet transaction.
C.capital infusion transaction.

A.$92.89
B.$99.07
C.$107.44

Answer = A

B is correct because if the discount rate rises to 7.5% from 6.5%, the price of a bond decreases. At a discount rate of 7.5%, the bond sells at a discount to face value. As a discount bond approaches maturity, it will increase in price over time until it reaches par at maturity.

102. A fixed income security’s current price is 101.45. You estimate that the price will rise to 103.28 if interest rates decrease 0.25% and fall to 100.81 if interest rates increase 0.25%. The security’s effective duration is closest to:

Study Session 16-59-d
Calculate and interpret the effective duration of a bond, given information about how the bond’s price will increase and decrease for given changes in interest rates.

B is correct because the effective duration equals
(Price if rates fall – Price if rates rise)/(2 × Current price × Change in rates) = (103.28 – 100.81)/(2 × 101.45 × 0.0025) = 4.87.

A.Both are affirmative covenants.

B.Covenant 1 is negative and Covenant 2 is affirmative. C.Covenant 1 is affirmative and Covenant 2 is negative.

A.par value plus accrued interest.

B.accrued interest plus agreed upon bond price. C.agreed upon bond price excluding accrued interest.

105. An investor purchases a 5% coupon bond maturing in 15 years for par value. Immediately after purchase, the yield required by the market increases. The investor would then most likely have to sell the bond at:

A.par.

106. Given two otherwise identical bonds, when interest rates rise, the price of Bond A declines more than the price of Bond B. Compared to Bond B, Bond A most likely:

A.is callable.

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107. A BBB-rated corporation wishes to issue debt to finance its operations at the lowest cost possible. If it decides to sell a pool of receivables into a special purpose vehicle (SPV), its primary motivation is most likely to:

B is correct because a key motivation for a corporation to establish a special purpose vehicle (SPV) is to separate it as a legal entity. In the case of bankruptcy for the corporation, the SPV is unaffected because it is not a subsidiary of the corporation. Given this arrangement, the SPV can achieve a rating as high as AAA and borrow at lower rates than the corporation.

108. Which of the following is least likely a tool used by the U.S. Federal Reserve Bank to directly influence the level of interest rates?

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

Questions 109 through 114 relate to Alternative Investments

B is correct because closed-end funds trade in the secondary markets and do not offer a redemption feature.

110. An analyst is evaluating an investment in an apartment complex based on the following annual data:

Based on the income approach, the value of the investment is closest to:

A.$1,141,667.
B.$3,641,667.
C.$6,242,857.

The property is appraised based on cash flows and is independent of the financing decision. Thus, the market capitalization rate is used rather than the lending rate. Depreciation is also not deducted because it is implicitly assumed that repairs and maintenance allow the investor to keep the building in good condition.

111. Which of the following statements regarding biases in hedge fund performance in hedge fund databases is least likely correct?

“Alternative Investments,” Bruno Solnik and Dennis McLeavey
2012 Modular Level I, Vol. 6, pp. 227–229
Study Session 18-66-m
Describe the performance of hedge funds and the biases present in hedge fund performance measurement, and explain the effect of survivorship bias on the reported return and risk measures for a hedge fund database.

C is correct because hedge fund managers themselves, not database administrators, decide whether they want to be included in a database. Managers who have funds with an unimpressive track record will not wish to have that information exposed.

A.–€3,157,000.
B.–€1,140,000.
C. €2,017,000.

Answer = B

113. When market participants expect the spot price of a commodity to be higher in the future, the commodity market is most likely said to be in:

A.contango.

A is correct because when a commodity market is in contango, futures prices are higher than the spot price because market participants believe the spot price will be higher in the future. When spot prices are above the futures price, the market is said to be in backwardation.

114. Which of the following is least likely a reason for discounting the value of stock in a closely held company?

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Questions 115 through 120 relate to Portfolio Management

B is correct. Endowments have a long investment time horizon and a high level of risk tolerance. (See Exhibit 14 on pp. 295–296.)

116. An investor’s transactions in a mutual fund and the fund’s returns over a four-year period are provided in the table below:

“Portfolio Risk and Return Part I,” Vijay Singal
2012 Modular Level I, Vol. 4, pp. 324–330
Study Session 12-44-a
Calculate and interpret major return measures and describe their appropriate uses.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

CF1 = –1,500 (new investment atbeginning of Year 2).

The standard deviation of returns of the portfolio formed with these two stocks is closest to:

A.25.04%.
B.26.80%.
C.32.85%.

118. Risk that can be attributed to factor(s) that impact a company or industry is best described as:

A.market risk.

C is correct. Risk that is due to company-specific or industry-specific factors is referred to as

unsystematic risk.

B is correct.
𝛽 = 𝜌𝑖𝑚𝜎𝑖𝜎𝑚 𝜎𝑚2

“Basics of Portfolio Management and Construction,” Alistair Byrne and Frank E. Smuddle 2012 Modular Level I, Vol. 4, p. 457–458
Study Session 12-46-d
Distinguish between the willingness and the ability (capacity) to take risk in analyzing an investor’s financial risk tolerance.

B is correct. An individual’s ability to take risk is impacted by such factors as time horizon and

questions. To best simulate the exam day experience, candidates are advised to allocate an average of

1.5 minutes per question for a total of 180 minutes (3 hours) for this session of the exam.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

Questions 1 through 18 relate to Ethical and Professional Standards

“Guidance for Standards I-VII,” CFA Institute
2012 Modular Level I, Vol. 1, pp. 19–21, 46–47
Study Session 1-2-a
Demonstrate and explain the application of the Code of Ethics and Standards of Professional Conduct to situations involving issues of professional integrity.

A is correct because by failing to adhere to the non-compete clause he agreed to abide by when signing his employment contract, Hasina shows a lack of professional integrity toward his employer. This behavior reflects poorly on the good reputation of members and is a violation of the Code of Ethics, which states that members and candidates must act with integrity, and Standard I (D) Misconduct, which states that members and candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence. The Code of Ethics at times requires a member or candidate to uphold a higher standard than that required by law, rule, or regulation, or in this case the strict application of the employment agreement.

Answer = C

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

Answer = B

“Introduction to the Global Investment Performance Standards (GIPS®),” CFA Institute 2012 Modular Level I, Vol. 1, p. 173
Study Session 1-3-c
Explain the requirements for verification.

C.both Musa and Kassim.

Answer = C

5. Zhao Xuan, CFA, is a sell side investment analyst. While at a software industry conference, Zhao hears rumors that Green Run Software may have falsified its financial results. When she returns to her office, Zhao conducts a thorough analysis of Green Run. Based on her research, including discussions with some of Green Run’s customers, Zhao is convinced that Green Run’s reported 50% increase in net income during recent quarters is completely fictitious. So far, however, Zhao is the only analyst suspicious about Green Run’s reported earnings. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, the least appropriateaction for Zhao is to:

A.report her suspicions to Green Run’s management.

B is correct because the analyst has conducted thorough research that indicates the company falsified its financial results, and she should request the company address this issue publicly as recommended by Standard II (A) Material Nonpublic Information. If a member or candidate determines that information is material, the member or candidate should make reasonable efforts to achieve public dissemination of the information. This effort usually entails
encouraging the issuer company to make the information public. If public dissemination is not possible, the member or candidate must communicate the information only to the designated supervisory and compliance personnel within the member’s or candidate’s firm and must not take investment action on the basis of the information.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

A is correct because selling stock short is a management strategy and does not necessarily violate any aspect of the Code and Standards.

7. Kirsten Kelso, CFA, is a research analyst at an independent research firm. Kelso is part of a team of analysts who focus on the automobile industry. Recently, Kelso disagreed with two research sell recommendations written by her team even though she felt confident the research process was properly conducted. In a webcast open to all institutional but not retail clients, Kelso states “even though my name is on the sell reports, these stocks are a buy in part because sales and share prices for both auto companies will rise significantly due to strong demand for their vehicles.” Kelso’s actions would least likely violate which of the following CFA Institute Standards of Professional Conduct?

C is correct because the recommendation is based on a reasonable and adequate research process, so the analyst could follow the research team’s opinion, as required by Standard V (A) Diligence and Reasonable Basis.

8. Gardner Knight, CFA, is a product development specialist at an investment bank. Knight is responsible for creating and marketing collateralized debt obligations (CDOs) consisting of residential mortgage bonds. In the marketing brochure for his most recent CDO, Knight provided a list of the mortgage bonds that the CDO was created from. The brochure also states “an independent third party, the collateral manager, had sole authority over the selection of all mortgage bonds used as collateral in the CDO.” However, Knight met with the collateral manager and helped her select the bonds for the CDO. Knight is leastlikely to be in violation of which of the following CFA Institute Standards of Professional Conduct?

9. Monique Gretta, CFA, is a research analyst at East West Investment Bank. Previously, Gretta worked at a mutual fund management company and has a long-standing client relationship with the managers of the funds and their institutional investors. Gretta often provides fund managers, who work for Gretta’s former employer, with draft copies of her research before disseminating the information to all of the bank’s clients. This practice has helped Gretta avoid several errors in her reports, and she believes it is beneficial to the bank’s clients, even though they are not aware of this practice. Regarding her research, Gretta least likely violated the CFA Institute Code of Ethics and Standards of Professional Conduct because:

A.her report is a draft.

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Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.

C.investments outside his mandate.

Answer = A

A.Fair Dealing
B.Communication with Clients
C.Diligence and Reasonable Basis

Answer = A

B.intellectual property.

C.prospective client disclosure.

13.Oliver Opdyke, CFA, works for an independent research organization that does not manage any client money. In the course of his analysis of Red Ribbon Mining he hears rumors the president of Red Ribbon, Richard Leisberg, has recently been diagnosed with late stage Alzheimer’s disease, a fact not publicly known. The final stage of Alzheimer’s is when individuals lose the ability to respond to their environment, the ability to speak, and, ultimately, the ability to control movement. Leisberg is the charismatic founder of Red Ribbon, and under his leadership the company grew to become one of the largest in the industry. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, the most appropriateaction for Opdyke is to:

A.immediately publish a sell recommendation for Red Ribbon Mining.

C is correct because members and candidates should make reasonable efforts to achieve public dissemination of information that is material and nonpublic, as required by Standard II (A) Material Nonpublic Information. This effort usually entails encouraging the issuer company to make the information public. In this case, if the diagnosis is fact and not rumor, then this information is material and should be disclosed.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

C.recommendation.

Answer = B

B.to CFA Institute when the investigation concludes. C.to CFA Institute if the allegations are proven correct.

Answer = A

A.return of capital.

B.promised returns.

17.Jan Loots, CFA, quit his job as a portfolio manager at an investment firm with whom he had a non-solicitation agreement he signed several years ago. Loots received permission to take his investment performance history with him and also took a copy of the firm’s software-trading platform. Subsequently, Loots sent out messages on social media sites announcing he was looking for clients for his new investment management firm. Access to Loots’ social media sites is restricted to friends, family, and former clients. Loots least likely violated the CFA Institute Standards of Professional Conduct concerning his:

A.trading software.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

C is correct because the portfolio manager received permission to use his investment
performance history from his prior employer. The member violated his non-solicitation agreement by indicating his availability to new clients on several social media sites accessible by clients of his former employer, a violation of Standard IV(A) Loyalty, because he did not act for the benefit of his former employer. In this case, the member may cause harm to his former employer if his weekend messages result in clients moving to his new business from his former employer. The member also violated this standard by taking his employer’s property, trading software.

Answer = A

CFA Institute Standards
2012 Modular Level I, Vol. 1, pp. 19–21, 59, 131
Study Session 1-2-c
Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.

𝑃𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝑡ℎ𝑒 𝑛𝑒𝑤 𝑖𝑛𝑓𝑜𝑟𝑚𝑎𝑡𝑖𝑜𝑛 𝑔𝑖𝑣𝑒𝑛 𝑒𝑣𝑒𝑛𝑡
= 𝑈𝑛𝑐𝑜𝑛𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝑡ℎ𝑒 𝑛𝑒𝑤 𝑖𝑛𝑓𝑜𝑟𝑚𝑎𝑡𝑖𝑜𝑛 × 𝑃𝑟𝑖𝑜𝑟 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝑒𝑣𝑒𝑛𝑡

Using Bayes’ formula (given above), the updated (posterior) probability that the company’s EPS are below the consensus is closest to:

B is correct. First, calculate the unconditional probability for a cut in dividends: P(Cut div) = P(Cut div│EPS exceed) × P(EPS exceed)
+ P(Cut div│EPS equal) × P(EPS equal)

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

B.to have a variance equal to that of the entire population.

C.to have a mean smaller than the mean of the entire population.

21.A project offers the following incremental after-tax cash flows:

“Discounted Cash Flow Applications,” Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
2012 Modular Level I, Vol. 1, pp. 312–314
“Capital Budgeting,” John Stowe and Jacques R. Gagne
2012 Modular Level I, Vol. 4, pp. 10–11
Study Session 2-6-a, 11-36-d
Calculate and interpret the net present value (NPV) and the internal rate of return (IRR) of an investment.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

A.8.2%.

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23.Given the following information about three portfolios:

A.Portfolio A
B.Portfolio B
C.Portfolio C

Answer = B

A.P(A).

B.P(B).

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25.Assume that the real risk-free rate of return is 3% and that the expected inflation premium is 5%. If the risk premium incorporates default risk, liquidity risk, and any maturity premium, an observed (nominal) interest rate of 12% implies that the risk premium is closest to:

“The Time Value of Money,” Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
2012 Modular Level I, Vol. 1, pp. 256–258
Study Session 2-5-b
Explain an interest rate as the sum of a real risk-free rate, expected inflation, and premiums that compensate investors for distinct types of risk.

A is correct. The nominal rate = real risk-free rate of return + an inflation premium + risk premiums (default, liquidity, maturity preference).
In this case, 12 = 3 + 5 + X. Solve for X. X = 4.

Answer = B

“Discounted Cash Flow Applications,” Richard A. Defusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
2012 Modular Level I, Vol. 1, p. 318
“Capital Budgeting,” John D. Stowe and Jacques R. Gagne
2012 Modular Level I, Vol. 4, pp. 13–15
Study Session 2-6-b, 11-36-d, e
Contrast the NPV rule to the IRR rule, and identify problems associated with the IRR rule.

27.A low price range in which buying activity is sufficient to stop a price decline is best described as:

A.support.

A is correct. Support is defined as a low price range in which buying activity is sufficient to stop the decline in price.

28.An investor purchases one share of stock for $85. Exactly one year later, the company pays a dividend of $2.00 per share. This is followed by two more annual dividends of $2.25 and $2.75 in successive years. Upon receiving the third dividend, the investor sells the share for $100. The money-weighted rate of return on this investment is closest to:

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

29.Independent samples drawn from normally distributed populations exhibit the following characteristics:

“Hypothesis Testing,” Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle 2012 Modular Level I, Vol. 1, pp. 608–612
Study Session 3-11-g
Identify the appropriate test statistic and interpret the results for a hypothesis test concerning the equality of the population means of two at least approximately normally distributed
populations, based on independent random samples with (1) equal or (2) unequal assumed variances.

B is correct. The t statistic for the given information (normal populations, variances assumed equal) is calculated as:

In this case we have:

C.Divide X by the difference between the standard deviation of X and the standard deviation of the standard normal distribution.

Answer = A

Answer = B

“The Time Value of Money,” Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E.

32.A technical analyst has detected a price chart pattern with three segments. The left segment shows a decline followed by a reversal to the starting price level. The middle segment shows a more pronounced decline than in the first segment and again a reversal to near the starting price level. The third segment is roughly a mirror image of the first segment. This chart pattern is most accuratelydescribed as:

A.a triple bottom.

C is correct. An inverse head and shoulders pattern consists of a left segment that shows a decline followed by a reversal to the starting price level, a middle segment that shows a more pronounced decline than in the first segment and again a reversal to near the starting price level, and a third segment that is roughly a mirror image of the first segment.

Questions 33 through 44 relate to Economics

Answer = B

“Demand and Supply Analysis: Introduction,” Richard V. Eastin and Gary L. Arbogast 2012 Modular Level I, Vol. 2, pp. 31–33
Study Session 4-13-l
Calculate and interpret consumer surplus, producer surplus, and total surplus.

The income effect arising from this change in the price of Y is best described as the distance between:

A.Qb and Qa.
B.Qc and Qb.
C.Qc and Qa.

B is correct. When the price of Y falls, the budget constraint shifts outward from BC1 to BC2, indicating an increase in the consumption of Y. Points a and b reflect the change in consumption of Y due solely to a decrease in price because BC3 reduces her income by a sufficient amount to return her to her original indifference curve. Qc – Qb is the income effect (which is negative here) because this is an inferior good.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

Answer = B

“The Firm and Market Structures,” Richard G. Fritz and Michele Gambera
2012 Modular Level I, Vol. 2, pp. 157–160
Study Session 4-16-a
Describe the characteristics of different market structures: perfect competition, monopolistic competition, oligopoly, and pure monopoly.

“Aggregate Output, Prices, and Economic Growth,” Paul R. Kutasovic and Richard G. Fritz 2012 Modular Level I, Vol. 2, pp. 247–254
Study Session 5-17-h
Describe the causes of shifts in and movements along aggregate demand and supply curves.

A is correct. If stock prices rise, the aggregate demand curve will shift to the right (increase in AD) because of higher consumption (wealth effect), not lower investments.

Answer = B

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

Labor force participation rate = Labor force ÷ Working age population. Unemployment rate = Unemployed ÷ Labor force.

Answer = B

“International Trade and Capital Flows,” Usha Nair-Reichert and Daniel Robert Witschi 2012 Modular Level I, Vol. 2, pp. 444–450
Study Session 6-20-b
Distinguish between comparative advantage and absolute advantage.

The profit maximizing output for this firm (in units) is closest to:

A.7.

Describe the firm’s supply function under each market structure.

Describe and determine the profit-maximizing price and output for firms under each market structure.

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40.Which of the following government interventions in market forces is most likely to cause overproduction?

41.In an effort to influence the economy, a central bank conducted open market activities by selling government bonds. This implies that the central bank is most likely attempting to:

A.contract the economy by reducing bank reserves.

Determine whether a monetary policy is expansionary or contractionary.

A is correct. Selling government bonds results in a reduction of banks’ reserves and reduces banks’ ability to lend, causing a decline in money growth through the multiplier mechanism and hence leading to a contraction in the economy.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

Answer = A

43.Four countries operate within a customs union. One country proposes moving to a common market structure. What additional level of economic integration between the countries would most likely arise if this change took place? They would:

A.establish common trade barriers against non-members.

B is correct. A common market structure incorporates all aspects of the customs union and extends it by allowing free movement of factors of production among members.

44.The current spot rate for the USD/EUR is 0.7500. The forward rate for the EUR/Australian dollar (AUD) is 1.4300, which represents a 400 point forward premium to the spot rate (scaled up by four decimal places). The USD/AUD spot rate is closest to:

Convert forward quotations expressed on a points basis or in percentage terms into an outright forward quotation.

B is correct.

“Financial Statement Analysis: An Introduction,” Elaine Henry and Thomas R. Robinson 2012 Modular Level I, Vol. 3, pp. 27, 31
Study Session: 7-22-c, e
Describe the importance of financial statement notes and supplementary information—including disclosures of accounting policies, methods, and estimates—and management’s commentary.

Identify and explain information sources that analysts use in financial statement analysis besides annual financial statements and supplementary information.

The end of year owners’ equity is closest to:

A.$19,400.
B.$19,900.
C.$20,400.

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Answer = B

“Understanding Income Statements,” Elaine Henry and Thomas R. Robinson
2012 Modular Level I, Vol. 3, pp. 158–159
Study Session: 8-25-b
Describe the general principles of revenue recognition and accrual accounting, specific revenue recognition applications (including accounting for long-term contracts, installment sales, barter transactions, and gross and net reporting of revenue), and the implications of revenue recognition principles for financial analysis.

Sales $2,240,000
Cost of goods sold 1,320,000
Gross profit 920,000
Net Income $316,600

Selected Balance Sheet Data
as of December 31st
(Can $ thousands)
2011 2010

Total current assets

Other current liabilities 130,700 182,700
Total current liabilities $260,300$339,900

The company operates in an industry in which suppliers offer terms of 2/10, net 30. The payables turnover for the average company in the industry is 8.5 times. Which of the following statements is most accurate? In 2011, the company on average:

“Financial Analysis Techniques,” Elaine Henry, Thomas R. Robinson, and Jan Hendrik van Greuning
2012 Modular Level I, Vol. 3, pp. 352, 356
“Working Capital Management,” Edgar A. Norton, Jr., Kenneth L. Parkinson, and Pamela Peterson Drake
2012 Modular Level I, Vol. 4, p. 164
Study Session 8-28-b, 11-40-f
Classify, calculate, and interpret activity, liquidity, solvency, profitability, and valuation ratios.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

49.Which of the following will most likely result in an increase in a company’s sustainable growth rate?

A.Higher tax burden ratio
B.Lower interest burden ratio
C.Higher dividend payout ratio

A is correct.

Sustainable growth rate = Retention ratio × ROE.

A higher tax burden ratio (Net income/Earnings before tax) implies that the company can keep a higher percentage of pretax profits; this implies a lower tax rate and a higher ROE. The interest burden ratio is earnings before tax to EBIT, and a lower ratio means that the company has higher borrowing costs (it gets to keep a lower pre-tax income from a given EBIT), implying a lower ROE and sustainable growth.

50.During 2010, the following events occurred at a company. The company:

A is correct. The customer list is the only identifiable intangible asset, and it should be amortized on a straight-line basis over its expected future life: $100,000 ÷ 4 = $25,000/year. Goodwill is an unidentifiable intangible and should be tested for impairment but not amortized. All advertising and promotion costs, such as the media placements, are typically expensed. If the reputation of the company has been enhanced as the CEO suggests, this is an internally generated intangible that is not recorded on the balance sheet and is therefore not amortized.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

Answer = A

“Understanding Cash Flow Statements,” Elaine Henry, Thomas R. Robinson, Jan Hendrik van Greuning, and Michael A. Broihahn
2012 Modular Level I, Vol. 3, pp. 275–285
Study Session 8-27-c, d
Contrast cash flow statements prepared under International Financial Reporting Standards (IFRS) and U.S. generally accepted accounting principles (U.S. GAAP).

“Inventories,” Michael A. Broihahn
2012 Modular Level I, Vol. 3, pp. 416–418
Study Session: 9-29-f
Describe the measurement of inventory at the lower of cost and net realisable value.

A is correct. Under IFRS, the inventory would be written down to its net realizable value ($4.1 million), whereas under U.S. GAAP, market is defined as current replacement cost and hence would be written down to its current replacement cost ($3.8 million). The smaller write down under IFRS will reduce the amount charged to the cost of goods sold, as compared with U.S. GAAP, and result in a lower cost of goods sold of $0.3 million.

Explain the impairment of property, plant, and equipment and intangible assets.

C is correct. Intangible assets with indefinite lives need to be tested for impairment at least annually. PP&E (including land) and intangibles with finite lives are only tested if there has been a significant change or other indication of impairment.

B is correct. IFRS requires the effective interest method for the amortization of bond discounts/premiums. The bond is issued for 0.9228 × €50 million = €46.140.

Interest expense = Liability value × Market rate at issuance: 0.05 × €46.140 = €2.307.

A.improved because the debt-to-equity ratio decreased.

B.deteriorated because the debt-to-equity ratio increased. C.improved because the fixed charge coverage ratio increased.

A.days sales payable (DSP).

B.gains on the sale of long-term assets.

• using stock buybacks to offset dilution of earnings.

A is correct. An increase in the days sales payable would indicate the company is stretching out its payables, which would increase the cash from operations.

“Financial Reporting Mechanics,” Thomas R. Robinson, Jan Hendrik van Greuning, Karen O’Connor Rubsam, Elaine Henry, and Michael A. Broihahn
2012 Modular Level I, Vol. 3, pp. 76–78
Study Session: 7-23-g
Explain the use of the results of the accounting process in security analysis.

A is correct. Understanding the accounting process may assist an analyst in identifying earnings manipulation, but it will not prevent the manipulation of earnings by management. It is important for analysts to understand the accounting process so they can make adjustments for items not reported and to aid in the assessment of management’s judgment of accruals and valuations.

“Financial Reporting Mechanics,” Thomas R. Robinson, Jan Hendrik van Greuning, Karen O’Connor Rubsam, Elaine Henry, and Michael A. Broihahn
2012 Modular Level I, Vol. 3, p. 58
Study Session: 7-23-c
Explain the process of recording business transactions using an accounting system based on the accounting equation.

B is correct. There would be no effect on the accounting equation because the company has exchanged one asset for another. Cash has decreased, and office equipment, a capital asset, has increased.

Answer = C

“Financial Reporting Standards,” Elaine Henry, Jan Hendrik van Greuning, and Thomas R.

A.operates in the manufacturing industry.

B.has made significant acquisitions in the past.
C.has higher financial leverage than the industry.

61.Which of the following is least likely a benefit of the direct method for reporting cash flow from operating activities? Compared with the indirect method, the direct method provides:

A.supplementary data under U.S. GAAP.

62.A firm reported the following financial statement items:

“Understanding Cash Flow Statements,”Elaine Henry, Thomas R. Robinson, Jan Hendrik van Greuning, and Michael A. Broihahn
2012 Modular Level I, Vol. 3, pp. 312–313
Study Session: 8-27-i
Calculate and interpret free cash flow to the firm, free cash flow to equity, and performance and coverage cash flow ratios.

B is correct.

Answer = C

“Understanding Income Statements,” Elaine Henry and Thomas R. Robinson

250,000 × 7/12 145,833
Total before split 229,166
Including effect of 2:1 split 458,333

64.To gain insight into what portion of the company’s assets is liquid, an analyst will most likely use:

“Understanding Balance Sheets,” Elaine Henry and Thomas R. Robinson
2012 Modular Level I, Vol. 3, pp 252–253
“Financial Analysis Techniques,” Elaine Henry, Thomas R. Robinson, and Jan Hendrik van Greuning
2012 Modular Level I, Vol. 3, pp. 341–342; 359
Study Session 8-26-h, 8-28-b, c
Convert balance sheets to common-size balance sheets, and interpret common-size balance sheets.

Classify, calculate, and interpret activity, liquidity, solvency, profitability, and valuations ratios.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

Answer = A

B.$2,820.
C.$6,720.

Answer = B

Value for tax purposes:
Carrying amount = Start of year balance × (1 – 0.20)

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

67.An analyst is analyzing two companies in the same industry and believes that they have similar strategies regarding the use of property, plant, and equipment (PP&E). He also thinks that the PP&E assets of the two companies are roughly of the same age and have the same expected useful lives remaining. Company A uses the LIFO method of inventory valuation, and Company B uses the FIFO method. The following additional information is available from the companies’ financial statements:

C.uses more aggressive accounting estimates related to PP&E.

Answer = C

Current ratio adjusted to FIFO for Company A
(5,800 + 1,100) ÷ 4,300 1.60

Co A is more liquid

The analyst believes the two companies’ PP&E are of the same age; however, the useful life remaining for Company B’s assets is 15 years compared with 10 for Company A, implying B is using a longer useful life or more aggressive accounting policies.

The more aggressive PP&E estimates combined with the use of FIFO indicate that Company B has a lower quality of earnings, not higher. The adjusted current ratio for Company A (adjusted to include the LIFO reserve to convert the balance sheet to FIFO for comparison) is higher than the current ratio for B, indicating that A is more liquid.

“Financial Reporting Quality: Red Flags and Accounting Warning Signs,” Thomas R. Robinson and Paul Munter
2012 Modular Level I, Vol. 3, pp. 594–595
Study Session 10-33-b, d
Describe activities that will result in a low quality of earnings.

Describe common accounting warning signs and methods for detecting each.

Answer = B

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

A.Debt-rating approach only
B.Yield-to-maturity approach only
C.Both the yield-to-maturity and the debt-rating approaches

Answer = A

A.15%
B.18%
C.21%

Answer = C

72.Based on a need to borrow $2 million for one month, which of the following alternatives has the least expensive effective annual cost?

A.A banker’s acceptance with an all-inclusive annual rate of 6.1%
B.A credit line at 6.0% annually with a $4,000 annual commitment fee
C.Commercial paper at 5.9% annually with a dealer’s annual commission of $1,500 and a backup line annual cost of $3,500

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

73.Using the firm’s income statement presented, its degree of financial leverage is closest to:

74.The “per unit contribution margin” for a product is $12. Assuming fixed costs of $12,000, interest costs of $3,000, and taxes of $2,000, the operating breakeven point (in units) is closest to:

A.1,000.
B.1,250.
C.1,417.

75.Which of the following capital budgeting techniques is most directly related to stock price?

A.Net present value
B.Profitability index
C.Discounted payback period

76.A company’s data are furnished below:

A.11.5%.
B.13.0%.
C.14.0%.

Answer = B

A.Money market yield
B.Discount-basis yield
C.Bond equivalent yield

Answer = C

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

B is correct. The retained earnings in a pro forma analysis increases by net income less dividends:

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 = 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 × 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜 = $1.26 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 × 40% = 0.504 𝑚𝑖𝑙𝑙𝑖𝑜𝑛

79.The index weighting that results in portfolio weights shifting away from securities that have increased in relative value (e.g., decrease in book-to-market) toward securities that have fallen in relative value whenever the portfolio is rebalanced is most accurately described as:

A.equal weighting.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

B is correct. Fundamentally weighted indices generally will have a contrarian “effect” in that the portfolio weights will shift away from securities that have increased in relative value and toward securities that have fallen in relative value whenever the portfolio is rebalanced.

Answer = A

“Introduction to Industry and Company Analysis,” Patrick W. Dorsey, Anthony M. Fiore, and Ian Rossa O’Reilly
2012 Modular Level I, Vol. 5, pp. 234–235
Study Session 14-51-g
Describe product and industry life-cycle models, classify an industry as to life-cycle phase (e.g., embryonic, growth, shakeout, maturity, or decline) based on a description of it, and discuss the limitations of the life-cycle concept in forecasting industry performance.

B is correct. V0 = D1/(r – g).

Dividend growth rate over the period 2006–2011 = 1.25(1 + g)5 = 1.92; g = 8.96% ≈ 9%.

Answer = A

“Market Efficiency,” W. Sean Cleary, Howard J. Atkinson, and Pamela Peterson Drake 2012 Modular Level I, Vol. 5, pp. 148–149
Study Session 13-49-g
Contrast the behavioral finance view of investor behavior with that of traditional finance.

C.establish strong market research teams to match customer needs with product development.

Answer = A

84.The following data pertain to a margin purchase of a stock by an investor.

If the stock is sold exactly one year after the purchase, the total return on the investor’s investment is closest to:

A.14%.
B.19%.
C.22%.

A.brokered market.

B.order-driven market.
C.quote-driven market.

A.Operational
B.Allocational
C.Informational

Answer = C

B.with no restrictions on short selling.
C.with high information-acquisition costs.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

88.An analyst collects the following data on the return on equity (ROE) and the payout ratio for two companies, M and N. Using a required return of 12.4% for both companies, she computes the justified forward P/E ratios, which are also given below.

If Company M increases its dividend payout ratio to 40% and Company N decreases its dividend payout ratio to 30%, which of the following will most likely occur? The justified P/E ratio of:

“Equity Valuation: Concepts and Basic Tools,” John J. Nagorniak and Stephen E. Wilcox
2012 Modular Level I, Vol. 5, pp. 288–291
Study Session 14-52-g, h
Explain the rationale for using price multiples to value equity, and distinguish between multiples based on comparables versus multiples based on fundamentals.

Calculate and interpret the following multiples: price to earnings, price to an estimate of operating cash flow, price to sales, and price to book value.

Company N:
New dividend growth rate = (1 – 0.3) x 14% = 9.8%; New Justified forward P/E = 0.3/(0.124 – 0.098) = 11.5x.

89.A fund manager gathers the following data in order to assess a stock’s potential for a possible addition to her portfolio:

Answer = A

“Cost of Capital,” Yves Courtois, Gene C. Lai, and Pamela Peterson Drake
2012 Modular Level I, Vol. 4, pp. 52–53
“Overview of Equity Securities,”Ryan C. Fuhrmann and Asjeet S. Lamba
2012 Modular Level I, Vol. 5, pp. 194–195
Study Session 11-37-h; 14-50-h
Calculate and interpret the cost of equity capital using the capital asset pricing model approach, the dividend discount model approach, and the bond-yield-plus risk-premium approach. Compare a company’s cost of equity, its (accounting) return on equity, and investors’ required rates of return.

Answer = B

“Market Efficiency,” W. Sean Cleary, Howard J. Atkinson, and Pamela Peterson Drake 2012 Modular Level I, Vol. 5, pp. 140–144
Study Session 13-49-d, f
Contrast the weak-form, semi-strong-form, and strong-form market efficiency.

A.minimum account balance required as prices change.

B.performance bond ensuring fulfillment of the obligation.

92.A buyer would face the greatest risk of default with:

A.a farmer making physical delivery on a short soybean futures position.

“Futures Markets and Contracts,” Don M. Chance
2011 Modular Level I, Vol. 6, p. 53
Study Session 17-62-b
Compare futures contracts and forward contracts.

C is correct because in a forward contract, each party assumes the risk that the other party will default.

“Option Markets and Contracts,” Don M. Chance
2011 Modular Level I, Vol. 6, pp. 85–86
Study Session 17-63-c
Define the concept of moneyness of an option.

C is correct because only an in-the-money option would be exercised. Moneyness describes the relationship between the price of the underlying and an option’s exercise price.

“Option Markets and Contracts,” Don M. Chance
2011 Modular Level I, Vol. 6, pp. 98–100
Study Session 17-63-i
Define intrinsic value and time value, and explain their relationship.

C is correct because an out-of-the-money option will have an intrinsic value of zero at all times.

C.euro dollar time deposit in the United States.

Answer = A

B.pay the market value to the counterparty.
C.sell an offsetting swap listed on an exchange.

Answer = C

A.The floor in a floating-rate security
B.An accelerated sinking fund provision
C.The call option in a fixed-rate security

Answer = A

98.Consider two bonds that are identical except for their coupon rates. The bond that will have the highest interest rate risk most likely has the:

A.lowest coupon rate.

A is correct because a lower coupon rate means that more of the bond’s value comes from repayment of face value, which occurs at the end of the bond’s life.

99.Duration is most accurate as a measure of interest rate risk for a bond portfolio when the slope of the yield curve:

“Risks Associated with Investing in Bonds,” Frank J. Fabozzi
2012 Modular Level I, Vol. 5, pp. 359–363
Study Session 15-54-g
Describe yield-curve risk, and explain why duration does not account for yield-curve risk.

C is correct because duration measures the change in the price of a portfolio of bonds if the yields for all maturities change by the same amount; that is, it assumes the slope of the yield curve stays the same.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

Answer = C

Answer = C

“Understanding Yield Spreads,” Frank J. Fabozzi
2012 Modular Level I, Vol. 5, pp. 456–457
Study Session 15-56-e
Calculate and compare yield spread measures.

“Yield Measures, Spot Rates, and Forward Rates,” Frank J. Fabozzi
2012 Modular Level I, Vol. 5, pp. 538–539
Study Session 16-58-b
Calculate and interpret traditional yield measures for fixed-rate bonds, and explain their limitations and assumptions.

C is correct because a security with a present value of 96.47, 19 interest payments of 8, and a 20th payment of principal plus interest (108) has a yield to maturity of 8.37%.

B.higher.

C.the same.

A.$99.75.
B.$105.65.
C.$107.03.

Answer = B

105.Consider three bonds that have the same yield to maturity and maturity. The bond with the greatest reinvestment risk is most likely the one selling at:

A.par.

106.Using the U.S. Treasury forward rates provided below, the value of a 2½-year, $100 par value Treasury bond with a 5% coupon rate is closest to:

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

A.putable.

B.callable.

A is correct because when interest rates rise, a putable bond is more likely to be put back to the issuer by the investor, limiting the loss of value and giving the bond more positive convexity than an option-free bond. In contrast, a callable bond is likely to be called from the investor when interest rates fall, limiting the gain in value and giving the bond negative convexity.

108.The table below provides information about a portfolio of three bonds.

“Introduction to the Measurement of Interest Rate Risk,” Frank J. Fabozzi
2012 Modular Level I, Vol. 5, pp. 612–620
Study Session 16-59-g
Calculate the duration of a portfolio, given the duration of the bonds comprising the portfolio, and explain the limitations of portfolio duration.

A is correct because the market values of the bonds (Price × Par amount) are $17,479,376, $4,018,928, and $6,771,416, respectively, for a portfolio value of $28,269,720. Therefore, the duration of the portfolio is

109.Which of the following least likely describes an advantage of investing in hedge funds through a fund of funds? A fund of funds may provide investors with:

A.lower fees due to economies of scale.

A is correct because the fees on funds of funds are usually higher. The fund of funds manager charges a fee, and there is a fee charged by each hedge fund.

110.Compared with investment in an open-ended index mutual fund, which of these is least likely a benefit to an investor in an index exchange traded fund (ETF) on the same index?

A is correct because open-ended mutual fund shares are created and redeemed at net asset value with no bid–ask spread, whereas ETFs trade like stocks with a bid–ask spread.

111.Which of the following is least likely an aggregation vehicle for real estate ownership?

112.An investor might consider investments in commodities because, historically, commodity returns have had a higher positive correlation with:

A.inflation.

113.Do base management fees most likely get paid to the manager of a hedge fund regardless of the fund’s performance?

A.Yes
B.No, only when the fund’s gross return is positive
C.No, only when the fund’s net asset value exceeds the previous high water mark

114.The three main sources of return for commodities-related investments are:

A.collateral yield, roll yield, and spot price return.

A is correct because the three main sources of return for a commodities investment are collateral yield, roll yield, and spot price return.

Questions 115 through 120 relate to Portfolio Management

Answer = A

“Portfolio Management: An Overview,” Robert M. Conroy and Alistair Byrne 2012 Modular Level I, Vol. 4, pp. 296–300
Study Session 12-43-c
Describe the steps in the portfolio management process.

A.A and B.
B.A and C.
C.B and C.

Answer = C

B.market risk.

C.diversifiable risk.

118.Last year, a portfolio manager earned a return of 12%. The portfolio’s beta was 1.5. For the same period, the market return was 7.5% and the average risk-free rate was 2.7%. Jensen’s alpha for this portfolio is closest to:

A.0.75%.
B.2.10%.
C.4.50%.

If the expected market return is 9.5% and the average risk-free rate is 1.2%, according to the capital asset pricing model (CAPM) and the security market line (SML), which of the three stocks is most likely overvalued?

B is correct. Booraem Inc. is overvalued because it lies below the SML. The expected return, 12.85%, is less than the required return. According to the CAPM, the required return for Booraem Inc. is 0.1365 or 13.65%:
0.1365 = 0.012 + 1.5(0.095 – 0.012).

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently registered CFA candidates and copying, posting to any website, e-mailing, distributing, and/or reprinting the mock exam for any purpose.

Answer = A

“Basics of Portfolio Management and Construction,” Alistair Byrne and Frank E. Smuddle 2012 Modular Level I, Vol. 4, p. 474
Study Session 12-46-f
Explain the specification of asset classes in relation to asset allocation.

A.No.

B.Yes, related to Misconduct.

A.No.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

B is correct because Barrett's client base is made up of a small number of large
institutions so stating in the advertisement that his client base is a larger number is a misrepresentation and a violation of Standard I(C). In addition, since the advertisement focuses only on the benefits and does not mention the potential risks of these investments it is also potentially misleading to clients.

B is correct as Miffitt has not violated the confidentiality Standard which involves information about former, current, and prospective clients.

"Guidance for Standards I-VII CFA Institute"
2011 Modular Level I, Vol. 1, pp. 49-52
Study Session 1-2-c
Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.

A is correct as the information concerning the qualified opinion is non-public and if it is material she would be in violation of Standard II(A) if she took investment action based on the information. She should also make reasonable efforts to achieve public
dissemination of the information.

Answer = B

"Guidance for Standards I-VII CFA Institute"
2011 Modular Level I, Vol. 1, pp. 78-81
Study Session 1-2-b
Distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards.

A.Provide the information and inform her client.

B.Send the requested documents and inform her supervisor.

A.Duties to Clients
B.Duties to Employers
C.Communication with Clients

program. He has also violated a duty to his employer as contradicting employer instructions are not permitted unless the member is acting to protect the integrity of capital markets and the interests of clients.

1. deducts all fees and taxes;
2. uses actual and simulated performance results;
3. bases the performance on a representative individual account.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

Answer = C

B.No, because she has taken steps to ensure the violations will not be repeated by the analyst.

C.No, because she is taking steps to implement compliance procedures that are more than adequate.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

vendor when it applies to her country and would like to use a local vendor on whom she has already conducted due diligence. Which of the following actions concerning the research vendor should La Valle most likely take to avoid violating the CFA Institute Standards of Professional Conduct?

"Guidance for Standards I-VII CFA Institute
2011 Modular Level I, Vol. 1, pp. 107-109
Study Session 1-2-c
Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.

A is correct. When a member has reason to suspect that either secondary or third-party research or information comes from a source that lacks a sound basis, the member must not rely on that information as indicated by Standard V(A) Diligence and Reasonable Basis.

Answer = B

"Guidance for Standards I-VII CFA Institute"
2011 Modular Level I, Vol. 1, pp. 116-118
Study Session 1-2-c
Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.

B.Sell his stock holdings to eliminate any potential conflict of interest.

C.Refuse to write the report and ask his employer to assign another analyst to complete the analysis.

A.No.

B.Yes, related to Misconduct.

C is correct as Standard VI (B) requires that investment transactions for clients and employers have priority over transactions in which members have beneficial ownership. By executing her own accounts transactions with those of the hedge fund the analyst has violated this Standard. Micro cap securities can be thinly traded and easily influenced by changes in the volume of activity so that the analyst may benefit when she combines her transactions with the hedge funds and she should let the fund execute its orders before she makes changes to her account.

"Guidance for Standards I-VII CFA Institute"
2011 Modular Level I, Vol. 1, p. 136
Study Session 1-2-b
Distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards.

B is correct because Standard VI(C) requires disclosure of any compensation,
consideration, or benefit received from or paid to others for the recommendation of products or services. Even without cash changing hands the arrangement provides for a quid pro quo referral of clients and should be disclosed.

A.CFA Institute.

B.CFA Program.

A.fines for violations.

B is correct as the CFA Institute may revoke membership for violations of the Institute Code of Ethics.

Questions 19 through 32 relate to Quantitative Methods

Answer = C

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

The 95% confidence interval is closest to:

A.a lower bound of -2.33 and an upper bound of 14.83. B.a lower bound of -2.20 and an upper bound of 14.70. C.a lower bound of -0.71 and an upper bound of 13.20.

concept is based on a two-tailed approach. For a 95% confidence interval, 2.5% of the distribution will be in each tail. Thus, the correct t-statistic to use is 2.262. The confidence interval is calculated as:

A.340 and 424.
B.354 and 410.
C.396 and 480.

A.14.00.
B.15.56.
C.17.20.

The sum of the ten numbers is 140. Dividing by 10 gives the mean of 14.

Add one to each of the given returns, then multiply them together, then take the fourth root of the resulting product. 0.92 × 1.04 × 1.17 × 0.88 = 0.985121. 0.985121 raised to the 0.25 power is 0.996259. Subtracting one and multiplying by 100 gives the correct geometric mean return of -0.37%.

2011 Modular Level I, Vol. 1, p. 557
Study Session 3-10-e
Calculate and interpret the standard error of the sample mean.

The standard error of the sample mean, when we know the sample standard deviation, is:

Answer = B

“Probability Concepts,” Richard A. Defusco, CFA, Dennis W. McLeavey, CFA, Jerald E.

Answer = A

“Time Value of Money,” Richard A. Defusco, CFA, Dennis W. McLeavey, CFA, Jerald E. Pinto, CFA, and David E. Runkle, CFA
2011 Modular Level I, Vol. 1, pp. 286-290
Study Session 2-5-d, f
Solve time value of money problems when compounding periods are other than annual.

A = 30000 / 49.318433 = 608.291829