2 2019 Level I Mock Exam (B) AM
2019 LEVEL I MOCK EXAM (B) AM
2019 Level I Mock Exam (B) AM 3

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
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.
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 |
|
B Attributing her superior returns to participation
in 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
A Report the observed activities to her
employer.
B Remove her name from the micro cap stock research
report.
2019 Level I Mock Exam (B) AM 9
A Provide the information and inform her client.
B Send the requested documents and inform her
supervisor.
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?
10 2019 Level I Mock Exam (B)
AM
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.
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 meet at least 85% of the requirements before
claiming compliance.

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.

|
–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.
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.
A Reduction in the degree of confidence
B Increase in the sample size
Sampling and Estimation
LOS i, j
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:
= 10.80%
A is incorrect. It calculates the arithmetic mean:
10
B skewed to the right.
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 regulatory compliance.
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.
A is incorrect. It inverts the currencies.
Currency Exchange Rates
LOS e, h
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
22 2019 Level I Mock Exam (B)
AM

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


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%.
42 The price index that best resolves the
substitution bias is the: A Fisher index.
B Laspeyres index.
C Paasche index.
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.
44 By themselves, financial ratios are least
likely to be sufficient in determining a company’s:
A past performance.
Liabilities
|
100 |
4,000 |
Capital expenditures
|
140 |
550 |
|
1,250 |
12,000 |
|
1,160 |
11,000 |
|
90 |
1,000 |
B assets.
C revenue.
47 Which of the following approaches will most
likely reveal manipulation of finan- cial reporting?
B is incorrect because investors need to evaluate warning signals
cohesively, not on an isolated basis.
Financial Reporting Quality
LOS i

28 2019 Level I Mock Exam (B)
AM

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

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.
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.
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
|

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.
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.
2019 Level I Mock Exam (B) AM
33
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:
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:

60 Which of the following statements about cash flow
ratios is most valid?
61 The following data are available on a company for
the current year:
B is incorrect. This is comprehensive income less dividends (£246,000
– £60,000 = £186,000).
|
$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.
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 Links to factors that drive overall corporate
performance B Reasonably consistent total compensation
from year to year
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?
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.
Using the capital asset pricing model (CAPM) approach, the cost of
equity (%)
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 longer, but its cash conversion cycle is
shorter.

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

LOS b

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:
● |
● |
|
● |
● |
|
● |
● |
|
● |
● |
|
● |
● |
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%.

76 The following table presents historical
information for two stocks, RTF and KIU:
C 1.50.
2019 Level I Mock Exam (B) AM
43
β |
= |
ρ i m |
σ σ i |
m |
= |
A is incorrect. |
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

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

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.
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?
86 A change in which of the following best
describes a macroeconomic influence on industry growth?
87 A corporate manager pursuing a low- cost strategy
will most likely: A engage in offering
products of unique quality or type.
48 2019 Level I Mock Exam (B)
AM
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
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 %

93 Which of the following statements regarding
rebalancing and reconstitution of an index is most
accurate?
94 Which of the following is most likely an
indicator of liquidity in the secondary market for bonds?
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.
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
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.
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
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.
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.
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.
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.
A
|
|
$1.2 million |
3.2 |
B
|
$3.4 million |
7.6 |
|
$2.9 million |
12.4 |
|
$1.6 million |
1.5 |
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.

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.

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