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Calculates the spot and expected spot rates correctly

2 2019 Level I Mock Exam (B) AM

2019 LEVEL I MOCK EXAM (B) AM

1
A
B is correct because Standard I–Professionalism requires members and candidates

(Duty to Clients) would be applicable as it is the stricter of the two.

a higher standard than that of the Code and Standards.

Standard I(A)–Knowledge of the Law

2

A

2019 Level I Mock Exam (B) AM 3

Standard IV(A)–Loyalty

3

A
C is correct because no designation exists for someone who has passed Level I, Level II,

B is incorrect as a person can only state he is a Candidate if he is currently enrolled in the CFA Program.

Guidance for Standards I–VII
LOS a

Standard VII(B)–Reference to CFA Institute, the CFA Designations, and the CFA Program
A

C violated both Misconduct and Integrity of Capital Markets Standards.

4 2019 Level I Mock Exam (B) AM

Guidance for Standards I–VII
LOS a

C is correct because Smirnov violated Standard V(A)–Diligence and Reasonable basis because she recommended an external advisor without first understanding the adviser’s compliance and internal control procedures. She was correct in seeking to understand the proposed fund manager’s code of ethics, quality of performance returns, and ability to adhere to its stated investment strategy, but to complete her work she also needed to perform due diligence about the firm’s compliance and internal control procedures.

C

of his clients so there is no indication that a violation of Standard VI(B)–Priority of

liquid stocks does not appear to have a reasonable and adequate basis nor to be supported

Standard VI(B)–Priority of Transactions

7

Molly Burnett, CFA, is a portfolio manager for a fund that only invests in environmentally friendly companies. A multinational utility company recently acquired one of the fund’s best performing investments, a wind power com-pany. The wind power company’s shareholders received utility company shares as part of the merger agreement. The utility has one of the worst environmen-tal records in the industry, but its shares have been one of the top performers over the past 12 months. Because the utility pays a high dividend every three months, Burnett holds the utility shares until the remaining two dividends are paid for the year then sells the shares. Burnett most likely violated the CFA Institute Standard of Professional Conduct concerning:

A

in companies with good environmental records. Continuing to hold this investment,

only investments in companies with good environmental records.

Guidance for Standards I–VII

B Attributing her superior returns to participation in the CFA Program

C

C is incorrect because it is not a violation to not pay fees if the person does not claim

Guidance for Standards I–VII
Standard VII(B)–Reference to CFA Institute, the CFA Designation, and the CFA Program

A solicited the bank’s client.

B did not obtain consent to use the bank report.

C is incorrect because the analyst violated Standard I(C)–Misrepresentation by creating research materials without attribution, which is demonstrated when the manager adds to the new report a real estate study she saw in the Wall Street Journal, referencing the Journal only. In all instances, a member or candidate must cite the actual source of the information. If she does not obtain the report and review the information, the manager runs the risk of relying on second‐hand information that may misstate facts. Best practice would be to either obtain the complete study from its original author and cite only that author or to use the information provided by the intermediary and cite both sources.

Guidance for Standards I–VII
LOS b
Standard I(C)–Misrepresentation, Standard IV(A)–Loyalty, Standard V(C)–Record

C Priority of Transactions.

8 2019 Level I Mock Exam (B) AM

Guidance for Standards I–VII
LOS b
Standard I(A)–Knowledge of the Law, Standard I(D)–Misconduct, Standard II(B)–Market

Manipulation, Standard VI(B)–Priority of Transactions

A Report the observed activities to her employer.

B Remove her name from the micro cap stock research report.

participation or assistance in the illegal or unethical conduct.

2019 Level I Mock Exam (B) AM 9

Guidance for Standards I–VII

A Provide the information and inform her client.

B Send the requested documents and inform her supervisor.

C

A is incorrect as providing the requested information would violate the confidentiality

LOS c

13 Yao Tsang, CFA, has a large percentage of his net worth invested in the
Australian mining company Outback Mines, which he has held for many years. Tsang is in the process of moving to a new employer where he is responsible for initiating research on mining companies. Shortly after his move, Tsang is asked to complete a research report on Outback. In order to meet the CFA Institute Standards of Professional Conduct concerning his stock holding, which of the following actions is most appropriate for Tsang to take?

A is correct. Full disclosure should be made as required by Standard VI(A). This standard

ership needs to be adequately disclosed. As the stock in question has been held for

10 2019 Level I Mock Exam (B) AM

Standard VI(A)–Disclosure of Conflicts

14 Joan Tasha, CFA, a supervisor at Olympia Advisors (OA), wrote and imple-mented compliance policies at her firm. A long- time OA employee, Derek Longtree, recently changed the asset allocation of a client, which is incon-sistent with her financial needs and objectives and with OA’s policies. Until now, Longtree has never violated OA’s policies. Tasha discusses the issue with Longtree but takes no further action. Do Tasha’s actions concerning Longtree most likely violate any CFA Institute Standards of Professional Conduct?

A is incorrect as a violation of Standard IV(C)–Responsibilities of Supervisors has occurred.

B is incorrect as there is no indication that the supervisor failed to take reasonable efforts to detect and prevent violations of Oaktree’s policies by Longtree.

B Asset managers including the performance of all portfolios including those no longer managed in their performance history.

2019 Level I Mock Exam (B) AM

11
C

C is incorrect because. By having consistent reporting styles for performance measure-ment between asset managers, valid comparisons are easier for the client and potential client to obtain. This was one of the objectives of the GIPS standards.

Introduction to the Global Investment Performance Standards (GIPS)

C

promote fair competition amongst investment management firms in all mar-kets requiring common fee structures.

B is incorrect because the GIPS standards do obtain global acceptance of calculation

C meet at least 85% of the requirements before claiming compliance.

A is correct. Firms must comply with all requirements of the GIPS standards, including any

C is incorrect because firms must comply with all requirements of the GIPS standards,

The GIPS Standards

A is correct. The single most important factor in promoting ethical behavior within an investment firm is done by the development, maintenance, and demonstration of a strong culture of integrity by the firm’s senior management.

B is incorrect. While adopting a code that clearly lays out the ethical principles that guide the thought processes and conduct the firm expects of its employees, a code of ethics alone is insufficient.

C an approach to back- test data.

C is incorrect; it more correctly describes historical simulation.

LOS p
Year 0 1 2 3 4 5 6
–12,500 2,000 4,000 5,000 2,000 1,000 500

B 2.5%.

C 4.4%.

Rate NPV

€1,028.38
€355.75
–€10.20

5.5% is closest to zero and thus closest to the IRR of the project.

A independence of the samples is statistically significant.

B standard error of the mean differences is low relative to the sample mean difference.

includes the sample mean difference in the numerator. Therefore, a lower standard error

(denominator) relative to the sample mean difference (numerator) results in a higher

C is incorrect because if the null hypothesis is rejected, the evidence is statistically

significant.

22 A tree diagram is most likely used when dealing with investment problems that involve outcomes that are:
A independent at each node.
B mutually exclusive.

C unconditional at each node.

P(A) = x

Outcome 2

Expected Value

A is incorrect. Two outcomes are independent if the occurrence of one outcome does not affect the probability of occurrence of the other outcome. At each node of a tree diagram, the two outcomes that follow are dependent because the probability on the outcome on one branch is related to the probability of the outcome on the other branch.C is incorrect. Outcomes are unconditional when the probability of an outcome is not conditioned on another outcome. In a tree diagram, outcomes at each node are conditional (the probability of an outcome is conditioned on another outcome).

Probability Concepts
LOS a, g
Section 2

1

The probability of any Event E is a number between zero and one.

2

The sum of the probabilities of any set of mutually exclusive and exhaustive

24 Two events A and B are independent if the probability of occurrence of A: A equals the product of the individual probabilities of occurrence of A and B. B is related to the occurrence of B.

C does not affect the probability of occurrence of B.

C is correct. When two events are independent, the events are unrelated and the prob-

B is incorrect because an event is considered dependent when the probability of

A Reduction in the degree of confidence
B Increase in the sample size

Sampling and Estimation
LOS i, j

Sections 4.2, 4.3

The geometric mean return is closest to:
A 10.89%.
B 10.80%.
C 9.62%.

B is correct. The geometric mean return is calculated as the Tth root of the product of T terms, where the terms are one plus the returns and T is the number of returns. After taking the Tth root, subtract one:

R G =
+ R t



1

1

T

= 10.80%
A is incorrect. It calculates the arithmetic mean:

2 2 . % + 6 2 . % + 8 9 . % + 9 3 . % + 10 5 . % + 11 7 . % + 12 3 . % + 14 1 . % + 15 3 . % + 18 4 . %

10

B skewed to the right.

C

skewed to the left.

(positively skewed).
distribution.

skewed.

Section 3.4

28 In Elliott Wave Theory, Wave 2 commonly exhibits a pattern best described as a(n):
A basing pattern consisting of five smaller waves.

B is correct. Wave 2 is a correction, retracing much of the gain from Wave 1, but not all of

of three smaller waves.

LOS g

C is correct. An opportunity cost is the value that investors forgo by choosing a particular

A is incorrect. A sunk cost is one that has already been incurred and therefore cannot

Section 2

C is correct. The future value (FV) of a given lump sum, calculated using continuous compounding, is: FV = PVerN = 2,000 × e0.06 × 4 = £2,542.49 ~ £2,542.

LOS d, e

B regulatory compliance.

C

service to the firm.

B is incorrect. The CFA Institute Code of Ethics and the Standards of Professional

Section 3

32 A research report produced by a dealer includes the following exchange rates:

The expected appreciation (%) of the Canadian dollar (CAD) relative to the British pound (GBP) is closest to:
A –3.00
B 3.09.

C 0.70.

Spot Expected Spot Rate in One Year

Appreciation:

Rate

Expected/Spot – 1

USD/EUR 1.3960 1.3860 –0.72%
1.0110 1.0300 1.88%
EUR/GBP 1.2850 1.2790 –0.44%
=
–2.99%
1.7743
1.7211

GBP/
CAD*

0.5636 0.5810 3.09%

* Canadian dollar is the base currency and the British pound is the price currency

33 The following information is available:

New Zealand dollar (NZD) to British pound (GBP) spot exchange rate: 2.0979

A 39.

B 348.

Forward points = (Forward – Spot) × 10,000 = (2.1155– 2.0979) × 10,000 = 175.3 =176 (rounded)

A is incorrect. It inverts the currencies.

Currency Exchange Rates
LOS e, h

Exports Imports
4,800 6,500
0.70 0.55

Following a 12% depreciation in the DCU, the trade balance will be closest to: A –1,726.
B –1,648.
C –1,674.

Alternatively, the change in the trade balance can be calculated from % changes in

A is incorrect. It applies the demand elasticities on current levels, but ignores sign of depreciation: –26
New trade balance: –1,700 – 26 = –1,726
C is incorrect. It applies the demand elasticities on current levels and uses (–) sign for 12%.

Change in trade balance: –12% × [(4,800 × 0.70) – (6,500 × 0.55)] = 26 New trade balance: –1,700 +26 = –1,674
Currency Exchange Rates
LOS j
Section 5.1
Topics in Demand and Supply Analysis
LOS a
Section 2.2
The Firm and Market Structures
LOS b
Section 3.1.1

A

22 2019 Level I Mock Exam (B) AM

markets.
LOS j

36 Which of the following is least likely to be a valid function/characteristic of money? Money:
A provides a store of wealth.

B is correct. The functions of money include being a means of payment, acting as a medium

A is incorrect. The functions/characteristics of money include store of wealth.

LOS b
A

C minimize interference with consumer choices.

C is incorrect because indirect taxes support social policies that are specifically aimed

Monetary and Fiscal Policy
C

revenue equals marginal cost—in this case, marginal cost crosses $10 per unit. Profits

The Firm and Market Structures

B is correct. The overwhelming nature of the highly negative income effect over the

40 The most recent economic data release indicates the following:

A is correct. During the peak phase of the business cycle, capital spending expands rapidly, but the rate of growth of consumer and business spending slows down; in addition, during the peak, businesses slow their rate of hiring, but the unemployment rate continues to fall.

B 2.38%.

C 2.44%.

× 100. In this case, [(252 – 246)/246] × 100 = 2.439%.
LOS e

42 The price index that best resolves the substitution bias is the: A Fisher index.

B Laspeyres index.
C Paasche index.

A is correct. The Fisher index is tje geometric mean of the Laspeyres and Paasche indexes,

uses the historical composition of a basket of goods, making it upward biased relative to

2019 Level I Mock Exam (B) AM 25

43 A positive movement in a lagging indicator would least likely be used to: A confirm that an expansion is currently underway.
B identify a past condition of the economy.

C

A is incorrect. A positive move in a lagging indicator by itself is insufficient to indicate

44 By themselves, financial ratios are least likely to be sufficient in determining a company’s:
A past performance.

B is correct. Financial ratios alone are not sufficient to determine the creditworthiness of a

of the company, meeting with management, touring company facilities, and so forth.

26 2019 Level I Mock Exam (B) AM

Sections 3.1.2, 6.1

300 6,000

Liabilities

100 4,000

Capital expenditures

140 550
1,250 12,000
1,160 11,000
90 1,000

B assets.

C revenue.

10% threshold.
LOS f
B is correct. Poor internal controls provide opportunities for errors or fraud to be incor-

internal controls are not a psychological process.

Financial Reporting Quality

47 Which of the following approaches will most likely reveal manipulation of finan- cial reporting?

C is correct. An investor should compare a company’s policies with those of its peers to

B is incorrect because investors need to evaluate warning signals cohesively, not on an isolated basis.

Financial Reporting Quality
LOS i

B is correct. Under the joint conceptual framework project of the IASB and the FASB,

Financial Reporting Standards

28 2019 Level I Mock Exam (B) AM

50 An analyst uses a stock screener and selects the following metrics from his equity universe:

A is correct. Metrics such as low P/E and low P/BV are aimed at selecting value companies;

Section 5.4

51 Which of the following events will most likely result in a decrease in a valuation allowance for a deferred tax asset under US GAAP? A(n):
A decrease in interest rates
B reduction in tax rates
C extension in the tax loss carry- forward period

the valuation allowance. Should circumstances change so that it is more probable that the deferred tax benefits will be recovered, the deferred asset account will be increased (and the valuation allowance decreased). An increase in the carry- forward period for tax losses extends the possibility that benefits will be realized from the deferred tax asset and would likely result in a decrease in the valuation allowance and an increase in the deferred tax asset.

A is incorrect. Interest rate changes are not related; there is no discounting of the future benefits from the deferred tax asset.

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

B lower.

C

average and LIFO methods.

next sale is 450 at $7.50 + 150 at $7.60. The perpetual and periodic methods make a

$ millions

Cost of ending inventory computed using FIFO Net realizable value
Current replacement cost

B is correct. Under IFRS, the inventory would be written down to its net realizable value ($4.1 million); under US GAAP, market value is defined as current replacement cost and thus 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 com-pared with US GAAP and result in a lower cost of goods sold of $0.3 million.

Inventories

54 If an analyst is concerned about the liquidity of a company’s inventory, he would most likely look in the notes to the financial statements to determine the: A amount of inventories recognized as expense during the period.

C is correct. The breakdown between work in progress and finished goods provides
than work in progress.

on the liquidity of the inventory on hand.

the inventory.
LOS j
31

Loan: Funds borrowed on 1 January 2012 and put to use immediately

€30 million

Total construction costs incurred during 2012 and 2013

€38.5 million

Depreciation method

Straight line

interest during the construction period can be capitalized and included in the cost of

Total capitalized cost
Straight line depreciation expense: (Capitalized cost – Residual value)/Useful life = (43.3 – 5.0)/40

43.3
0.9575

A return on assets to increase.

B return on equity to decline.

This increase will cause the return on equity to decline.

A is incorrect. The upward revaluation causes an increase in the carrying amount of the assets but bypasses net income and is reported as other comprehensive income (under the heading of revaluation surplus), increasing equity. This will cause the return on assets to decline (same income, higher assets).

C is incorrect. The upward revaluation causes an increase in the carrying amount of the assets but bypasses net income and is reported as other comprehensive income (under the heading of revaluation surplus), increasing equity. This will cause Net Income/ Sales to be unaffected.

(in thousands) Goodwill Licenses

Computer

Software

31 December 2019

65,321 8,243 5,257
7,324 821 334
1,244 2,102
(25)
Impairment charge for the year ? ? ?
73,194 10,856 8,214

Based on the data provided, the intangible asset that has the largest absolute impairment charge for the period ended 31 December 31 2020, is:
A computer software.

B licenses.

B is correct. Licenses will have the largest dollar impairment charge on the income

Amortization charge for year + Net Additions (Disposals)). In this case the largest impair-

2019 Level I Mock Exam (B) AM 33

C is incorrect because the amount of the impairment charge due to goodwill is less

58 A company issued a $50,000 seven- year bond for $47,565. The bonds pay 9% per annum, and the yield to maturity at issue was 10%. The company uses the effective interest rate method to amortize any discounts or premiums on bonds. After the first year, the yield to maturity on bonds equivalent in risk and maturity to these bonds is 9%. The amount of the bond discount amortization recorded in the first year is closest to:

A is correct.

Non- Current (Long- Term) Liabilities
LOS b
Section 2.2

59 Which of the following statements about balance sheets is most accurate? For balance sheets prepared under:

A

B is correct. Under US GAAP, intangibles must be valued at historical cost; under IFRS
would use this format.
LOS c, e

60 Which of the following statements about cash flow ratios is most valid?

A
B is correct. Debt payment ratio (Cash flow from operations/Cash paid for long- term debt

C is incorrect. Interest coverage ratio is calculated as (CFO + Interest paid + Taxes

Understanding Cash Flow Statements
Section 4.4

Sections 4.4.1, 4.4.2

61 The following data are available on a company for the current year:

35

B is incorrect. This is comprehensive income less dividends (£246,000 – £60,000 = £186,000).

Year 0 Year 1 Year 2 Year 3 Year 4
$21,600 $23,328 $37,791 $40,815

A 3.0.

B 3.2.

The first three cash flows recover $70,000 (in present value terms) of the cost, making only $5,000 of the $30,000 in Year 4 necessary to completely recover the cost. Therefore, the discounted payback is three years plus 5000/30,000, or 3.2 years.

63 In an acquisition, the interests of minority shareholders are best protected through the use of:
A sell- out rights.

B clawback provisions.

A is correct. Sell- out rights protect minority shareholders in acquisition situations by

C is incorrect. Covenants are the terms and conditions of lending agreements, enabling creditors to specify the actions an issuer is obligated to perform or is prohibited from performing. They are put in place to protect creditors.

Corporate Governance and ESG: An Introduction
LOS e

A

C is correct. The CEO and board chair roles should be separated to prevent too much
other.
LOS f

A Links to factors that drive overall corporate performance B Reasonably consistent total compensation from year to year

C

Higher total remuneration relative to peer companies with comparable performance

B is incorrect. Plans that exhibit little variation in results from year to year may be

Section 8.3

66 The cost of which source of capital most likely requires adjustment for taxes in the calculation of a firm’s weighted average cost of capital?

in the cost of equity.

67 The optimal capital budget for a firm is best described as occurring when the company’s marginal cost of capital is:
A equal to the investment opportunity schedule.

B less than the investment opportunity schedule.
C greater than the investment opportunity schedule.

A is correct. The optimal capital budget occurs when the marginal cost of capital (MCC)

C is incorrect. The optimal capital budget occurs when the marginal cost of capital

Using the capital asset pricing model (CAPM) approach, the cost of equity (%)

C

+ 1.6 × (6.0%) = 13.1%
flows from the project.
3.5% + 1.6 × (6.0% – 3.5%) = 7.5%
3.0% + 1.6 × (6.0%) = 12.6%
LOS h

per share. The expected dividend next year is $0.32, and the dividend growth

rate is expected to be 10% in perpetuity. Assuming the shares are issued at a

C is correct. Use the following formula:

where

r e= 
f )  +
0 1229 =

$ 14 69 1 ( −

0 05 )  + 0 .10

Cost of Capital

C is longer, but its cash conversion cycle is shorter.

B is correct. Operating cycle = Number of days of inventory + Number of days of receiv-

Revenue
Variable cost
Fixed cost

£800,000
400,000
200,000

The firm’s degree of total leverage (DTL) is closest to:
A 1.43.
B 2.00.
C 2.86.

Measures of Leverage

LOS b

C is correct. A “pull” on liquidity occurs when disbursements are made too quickly (e.g.,
B is incorrect because it is a “drag” on liquidity.
Working Capital Management

B is correct. Smaller companies use collateralized loans, factoring, or loans from non- bank companies as their sources of short- term financing. Larger companies can take advantage of commercial paper, banker’s acceptances, uncommitted lines, and revolving credit agreements.

74 A financial adviser gathers the following information about a new client:

The client is a successful economics professor at a major university.

Although concerned about the current health of the global economy, the client maintains that he is a long- term investor.

Based on the above information, which of the following best describes this client?

C is incorrect because the client has a high ability to withstand investment risk for the reasons identified above.

Basics of Portfolio Planning and Construction
LOS d, e

C 6.9% and 5.8%.

A is incorrect.
B is incorrect.
Portfolio Risk and Return: Part I

Section 2.2.3

76 The following table presents historical information for two stocks, RTF and KIU:

C is correct.

Covi,j = ρi,jσiσj = 0.06251/2 × 0.0901/2 × 0.450 = 0.0338
A is incorrect because Covi,j = ρi,jσiσj = 0.0625 × 0.090 × 0.450= 0.0025 (the variances are used instead of the standard deviations).

LOS c

C 1.50.

2019 Level I Mock Exam (B) AM 43

0 45 × 0 1235 × 0 0825 =
β = ρ i m σ σ i m =
σ 2
m
= 0 30
2
A is incorrect.
0 45 ×

0 0825 2

0 1235 × 0 0825

B 4.34%.

C 3.70%.

C is incorrect. Alpha is calculated as 0.155 – [0.025 + (0.118 – 0.025)] = 0.037. Portfolio Risk and Return: Part II
LOS h

accounting risks together form compliance risk. Legal risk is the risk of being sued or the

the risk of using the right model incorrectly.

Section 4.2
C

standard deviation.

derivative- like characteristics) to a change in the price volatility of the underlying asset.

Risk Management: An Introduction,

81 Which date in the chronology of a dividend payment is most likely determined by a security exchange?
A Holder- of- record date
B Declaration date
C Ex- dividend date

Sections 4.1

2019 Level I Mock Exam (B) AM 45

A is correct.

Investors’ current required return = $3.75/$50 = 7.50%
New required return = 7.50% + 0.75% = 8.25%
New market price = $3.75/0.0825 = $45.45
B is incorrect. Mistake in computing new return.

Next year’s sales revenue
Next year’s net profit margin
Dividend payout ratio
Dividend growth rate expected during Years 2 and 3 Dividend growth rate expected after Year 3
Investors’ required rate of return
Number of outstanding shares

$180 million
15%
60%
25%
5%
12%
8.1 million

Net profit margin = Net earnings/Sales

V3 = ( 0 12
V0 =
+ $ . 2 50 +
( 1 + 0 12 ) ( 1 + 0 12 ) 2 ( 1 + 0 12 ) 3

+ $46.86 = $52.86

Equity Valuation: Concepts and Basic Tools
LOS g

A is correct. A two- for- one stock split will double the number of shares, thus reducing the EPS to half of its pre- split value. P/E will remain unchanged because the price also reduces by half and exactly cancels out the effect of the reduced EPS. The dividend payout ratio remains unchanged because the same proportion of earnings will still be used after the split.

C is incorrect because the dividend payout ratio is unchanged.

85 Which of the following statements is most accurate about recessions?

A is correct. The impact of severe recessions usually reaches all parts of the economy

B is incorrect. Consumers do not tend to defer purchases from defensive companies

Section 3.2

86 A change in which of the following best describes a macroeconomic influence on industry growth?

A is correct. External factors affecting an industry’s growth include macroeconomic,

rates, or the cost of debt, is an example of a macroeconomic influence on industry

87 A corporate manager pursuing a low- cost strategy will most likely: A engage in offering products of unique quality or type.

C is correct. A corporate manager pursuing a cost leadership strategy must be able to

48 2019 Level I Mock Exam (B) AM

LOS k

88 In a highly efficient market, unexpected positive news on a stock is announced to the public. After this announcement, the difference between the market value and the intrinsic value of the stock will most likely:
A remain zero.

B decrease.

C is incorrect. In a highly efficient market, (1) market value reflects new information quickly and rationally, and (2) an asset’s market value equals its intrinsic value. In an inef-ficient market, (1) the market value of a stock adjusts slowly to an unexpected news, and (2) there are probably discrepancies between market value and intrinsic value. Therefore, only in an inefficient market could the difference between market and intrinsic values increase after the announcement of an unexpected positive news.

Market Efficiency
LOS b, a

Which of the three managers most likely displayed the disposition effect bias? A Manager Y
B Manager X
C Manager Z

A is correct. A company that follows a product or service differentiation strategy needs

development and marketing for which customers are willing to pay a premium.

B $30.86.

C $20.57.

B is incorrect. The mistake is in taking 0.40 as the initial equity. Initial equity per share at the time of purchase = $36 × 0.40 = $14.40 Price at which margin call occurs:
Equity per share/Price per share = Maintenance margin %

represents stocks of 23 developed and 22 emerging markets.

LOS h

93 Which of the following statements regarding rebalancing and reconstitution of an index is most accurate?

C

be deleted from the index, thus dramatically altering the prices of the affected stocks.

Security Market Indexes

Section 3.3

94 Which of the following is most likely an indicator of liquidity in the secondary market for bonds?

a wider bid–offer spread.
market auction.
2019 Level I Mock Exam (B) AM 51

95 ANZ Corporation has issued a three- year bond that makes semiannual interest payments in March and September at the coupon rate of six- month Libor + 250 bps. This bond is most likely referred to as a:
A floating- rate note.

B plain vanilla bond.

payment does not change during the bond’s life).

96 For two equally rated speculative grade bonds, what factor is least likely to account for differences in their valuation?

A Severity of loss
B Probability of default

C

of loss in the event of default, which can be quite different for similarly rated bonds.

A is incorrect because for speculative grade bonds with similar credit ratings the valuations may be quite different if the severity of loss associated with the two bonds is very different from each other.

Excerpt from the Consolidated Income Statement of Alpha Co. for the Fiscal

25.0 35.0

A improved.

B remained unchanged.

20X1 20X2
125.0 170.0

Interest expense

30.0 38.0

EBITDA/Interest expense

4.17 4.47

Fundamentals of Credit Analysis
LOS f
Section 5.2.1

98 Credit spreads are most likely to narrow during:

economic contractions. During an economic expansion, corporate revenues and cash flows rise, making it easier for corporations to service their debt, and investors purchase corporates instead of Treasuries, causing spreads to narrow.

99 Which of the following is least likely a form of internal credit enhancement used in a securitization?

A Subordination
B Overcollateralization

C is correct. The use of letters of credit is a type of external credit enhancement used

B is incorrect because overcollateralization is a type of internal credit enhancement

100 Residential mortgage- backed securities issued in the US by government- sponsored enterprises are guaranteed by:
A the full faith and credit of the government.

B the government- sponsored enterprise.
C external credit enhancements.

payment of principal and interest.

54 2019 Level I Mock Exam (B) AM

Section 5

101 Consider a five- 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 stay the same.

A is incorrect because the bond’s value must rise over time to be equal to its par value.

B is correct. Instrument C provides a bond equivalent yield of 5.96%, compared with 5.946% for Instrument A and 5.883% for Instrument B.

A is incorrect. To calculate the bond equivalent yield: FV = 100, Days = 90, Year = 360, DR = 0.0578.

2019 Level I Mock Exam (B) AM 55

103 Assume the following annual forward rates were calculated from the yield curve.

z4 = (1 005 ) × ( 1 007 ) × ( 1 01 ) × ( 1 015 )1 4 1 =
1 =

104 A bond is selling for 98.2. It is estimated that the price will fall to 96.6 if yields rise 30 bps and that the price will rise to 100.1 if yields fall 30 bps. Based on these estimates, the effective duration of the bond is closest to:
A 1.78.

B 5.94.

C
=

1 78

2 × 98 2 × 0 01
56 100 1 96 6 =
2019 Level I Mock Exam (B) AM
98 2 × 0 003
LOS b
Market Value Duration

A

$1.2 million 3.2

B

$3.4 million 7.6
$2.9 million 12.4
$1.6 million 1.5

in which the weight for each bond is its contribution to the portfolio's value, or wbond = Valuebond/Valueportfolio and Durationportfolio = Σwbond × Durationbond. In this case, value of the portfolio is 1.2 + 3.4 + 2.9 + 1.6 = 9.1 million, and the portfolio duration

equals (1.2/9.1 × 3.2) + (3.4/9.1 × 7.6) + (2.9/9.1 × 12.4) + (1.6/9.1 × 1.5) = 0.4220 + 2.8396 + 3.9516 + 0.2637 = 7.48.

106 The factor least likely to influence the yield spread on an option- free, fixed- rate bond is a change in the:
A credit risk of the issuer.
B expected inflation rate.
C liquidity of the bond.

B is correct. For an option- free, fixed- rate bond, changes in the yield spread can arise

arise from changes in the credit risk of the issuer.

LOS l

contract. It is set as part of the contract specifications.

LOS b

C

A is incorrect. As the time to maturity goes down, the value of the contract goes down.

109 Conceptually, a forward rate agreement most likely allows a company that wants to invest money in the future to lock in a rate by making a:
A variable payment and receiving a fixed payment.

B fixed payment and receiving a different fixed payment.
C fixed payment and receiving a variable payment.

58 2019 Level I Mock Exam (B) AM

110 In the binomial model, the difference between the up and down factors best represents the:
A volatility of the underlying.
B moneyness of an option.
C pseudo probability.

denominator) of the formula for the pseudo probabilities.

LOS n
C

underlying asset’s performance.

LOS a

112 Which of the following is most likely to be a feature common to both forward and futures contracts?

A Daily marking to market of contracts
B Standardization of the contract’s terms and conditions
C Their use for hedging or speculation

C is correct. Both forward and futures contracts can be used for hedging an exposure or

B is incorrect. Standardized contract terms and conditions are associated only with

113 If the implied volatility for options on a broad- based equity market index goes up, then it is most likely that:
A the broad- based equity market index has gone up in value.
B the general level of market uncertainty has gone up.

C market interest rates have gone up.

C is incorrect. Implied volatility does not provide information about the level of

114 Compared to traditional investments, alternative investments least likely demonstrate which of the following characteristics?

A Narrow manager specialization
B Underlying investments that are illiquid
C A high degree of regulation

investments are illiquid.

115 Capital provided for companies moving toward operation but before com-mercial manufacturing and sales have occurred best describes which stage in venture capital investing?

A Later stage
B Seed stage
C Early stage

C is correct. Early- stage financing is capital provided for companies moving toward
LOS b
C

including commodities in a portfolio of equities and bonds will reduce its exposure to

A is incorrect because commodities have low correlations with traditional securities

LOS c

117 With regard to venture capital, which of the following statements is most likely true regarding venture capital?

A Investments typically are in later stage and more established companies. B Investors tend to have short time horizons.

C is correct. The historical standard deviations of annual return for venture capital are

A is incorrect because the venture capital strategy typically invests in start- up or early

118 Commodity futures prices are most likely in backwardation when: A interest rates are high.

C is correct. In backwardation, futures prices are lower than spot prices, that is, the com-

yield is high. Futures price ≈ Spot price (1 + r) + Storage costs – Convenience yield.

LOS e

C 9.68%.

Management fee: 1% of $112 million = $1.12 million
Fund value after fees: $112 million – $1.12 million = $110.88 million
Investor return: ($110.88 million/$100 million) – 1 = 10.88%

Introduction to Alternative Investments

C

correlations of returns with the returns of traditional assets that are overstated.

Introduction to Alternative Investments

Section 8.2

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