The deferred tax liability increased income taxes los

2 2019 Level I Mock Exam (C) PM

2019 LEVEL I MOCK EXAM (C) PM

B Providing evidence for his position to an outside arbitration panel. C Using his CFA designation upon expiration of the suspension period.

2019 Level I Mock Exam (C) PM 3

B is incorrect because Yip does not disclose the commission structure in detail, which could impair her independence when recommending front- load mutual funds rather than back- end load mutual funds to her clients.

Guidance for Standards I–VII
LOS a
Standard VI(A)–Disclosure of Conflicts, Standard VI(B)–Priority of Transactions,

B is correct because Standard III(E)–Preservation of Confidentiality has not been violated. The analyst has a personal relationship with the officer of the auto company, and he is not a current, former, or prospective client, so there is no obligation for the analyst to maintain client confidentiality. However, the analyst did violate Standard I(C)–Misrepresentation when she represented another analyst’s work as her own. In addition, the analyst also violated Standard II(A)–Material Nonpublic Information by including data that were material and nonpublic in her research report on sales figures.

2019 Level I Mock Exam (C) PM 5

B Insist her name is removed from the report.
C Issue a new report based on her conclusions.

A is incorrect because the clients are unlikely be harmed by the manager also selling a US blue chip value stock in a stable market as the liquidity of the stock is likely to be large enough that a simultaneous sale would not negatively impact on the price of the share.

C is incorrect because the volume of UK government bonds offered through a primary market is likely to be large and at a fixed price based on the auction outcome. O’Neil’s bid would, however, need to be the same as her clients’ bids.

2019 Level I Mock Exam (C) PM 7

B is incorrect because Holmberg was not free to use the information and her conduct compromised the validity of her exam and violated Standard VII(A). Her conduct was also a violation of the rules and regulations of the CFA Program and the Candidate pledge, and the CFA Institute Code and Standards.

C is incorrect because Holmberg has an obligation to report her violation but does not have an obligation to report potential violations of the Code and Standards by fellow members, even though CFA Institute encourages such action.

C Yes, with regard to Duties to Employer.

8 2019 Level I Mock Exam (C) PM

11 At the conclusion of the afternoon section of the Level I CFA examination, the exam proctor instructs all candidates to stop writing and put their pencils down immediately. Krishna Chowdary sees other candidates in front of him continue to fill in their answer sheets. Chowdary has two questions left to complete so he randomly fills in one of the ovals on his answer sheet before putting his pencil down on the table. Did Chowdary’s actions most likely violate the CFA Institute Code of Ethics and Standards of Professional Conduct?

Yes. A
B No, because other candidates continued writing.

12 Upon receiving notification that he passed his Level III CFA exam, Paulo Garcia updates his educational background on his social media site by adding “completed the CFA course.” Does Garcia most likely violate the CFA Institute Standards of Professional Conduct?

A No.

13 Jackson Barnes, CFA, works for an insurance company providing financial plan-ning 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

with the disclosure being provided on the bills sent out in arrears.
Guidance for Standards I–VII

Guidance for Standards I–VII
LOS c

C is correct because if recommendations are contained in capsule form (such as a rec-ommended stock list), members and candidates should notify clients that additional information and analysis are available from the producer of the report as required by Standard V(B)–Communication with Clients and Prospective Clients. In this case, a clear statement on the website that more information is available upon request would be required.

A is incorrect because Moab’s plans for the social media recommendations do not violate Standard V(B)–Communication with Clients and Prospective Clients, so it does not need to describe the investment system in detail. The recommendation outlines the basic process and logic of Red’s investment approach and is sufficient enough for clients to understand its limitations or inherent risks.

2019 Level I Mock Exam (C) PM 11

A non- discretionary portfolios to be included in composites.

17 CFA Institute support of a local country sponsor to drive the adoption of the GIPS standards seeks to:
A provide a link between the governing body and the local markets.
B promote the standards as mandatory.

A The adviser benefiting more from the relationship than the client B The adviser not being subject to a code of ethics
C The adviser violating his employer’s published code of ethics

20 A stock’s expected price movement over the next two periods is as follows:

where u is an up move and d is a down move.

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 $79.20.

B is incorrect because it is the probability of an up move followed by an up move (0.75 × 0.75 = 0.5625).

C is incorrect because it is does not recognize that there are two branches that end in $79.20.

C lognormal.

2019 Level I Mock Exam (C) PM 15

transaction cost is taken into consideration.

25 The total probability rule is used when an analyst is interested in: A all potential outcomes.
B a set of events.

C a single outcome.

C is correct. The total probability rule explains the unconditional probability of an event in terms of probabilities conditional on mutually exclusive and exhaustive scenarios, where: P(A) = P(A│S)P(S) + P(A│SC)P(SC).

27 The sampling error is best described as the:
A sample standard deviation divided by the square root of the sample size. B difference between the observed value of a statistic and the quantity it is intended to estimate.

28 Use the following values from a student’s t-distribution to establish a 95% confidence interval for the population mean given a sample size of 10, a sample mean of 6.25, and a sample standard deviation of 12. Assume that the pop-ulation from which the sample is drawn is normally distributed and that the population variance is not known.

Degrees of

The 95% confidence interval is closest to a:
A lower bound of –2.20 and an upper bound of 14.70.
B lower bound of –0.71 and an upper bound of 13.21.
C lower bound of –2.33 and an upper bound of 14.83.

C is correct. With a sample size of 10, there are 9 degrees of freedom. The confidence interval 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:

29 Which of the following statements is most accurate? The first quintile generally exceeds the:
A first quartile.
B median.

A An increase in corporate income tax
B An increase in foreign currency per unit of domestic currency C An increase in capacity utilization

Percentage Increase

Currency Exchange Rates
LOS a

Country X is best described as having a comparative advantage over Country Y for producing:

Country X has an absolute advantage over country Y in producing both computers and phones.

The current account balance is closest to:

C is incorrect. It mixes up the direction of flow for the income payments and receipts and the unilateral transfers
Exports + Income payments made + Unilateral transfers paid = 10,000 + 1,107 + 2,519 + 1,107 = 13,626
Imports + Income payments received + Unilateral transfers received = 14,216 + 3,409 + 346 = 17,971
13,626 – 17,971 = –4,345
B is incorrect. It is simply Exports – Imports: 10,000 – 14,216 = –4,216
International Trade and Capital Flows
LOS h
Sections 4.1, 4.2

22 2019 Level I Mock Exam (C) PM

37 If a central bank reduces the money supply, this move will most likely lead to a: A rise in nominal interest rates and a decline in aggregate price level.

38 According to the Fisher effect, an increase in expected inflation will most likely increase:
A the real interest rate.

B both nominal and real interest rates.
C the nominal interest rate.

C is correct. The market outcomes for two firms in a duopoly is shown in the diagram. The lower left hand quadrant is the Nash solution when there is no collusion. However, with collusion, if ArcCo shares at least enough of its profit in the bottom right quad-rant to provide BatCo more than it would receive in the lower left, it will be the optimal solution for the pair: the maximum joint profits will arise where both firms charge high prices for the product.

41 Assume the following consumption basket and prices over 2011 and 2012 (in US dollars):

The Fisher index is closest to:
A 106.1.
B 105.4.
C 105.8.

Understanding Business Cycles
LOS f

2019 Level I Mock Exam (C) PM 25

C is incorrect. Although the average duration of unemployment is a lagging indicator, it is more directly indicating that an upturn has been underway, not that a downturn is forthcoming.

Understanding Business Cycles
LOS i

B that had the lowest profit margin experienced the most aggressive expansion.

B is incorrect. Assets in Segment 2 have grown the most at 15%, but Segment 1 has the lowest profit margin (in both years).

B Capital expenditures, liabilities, or profit/loss

A aggressive accounting.

B conservative accounting.

Financial Reporting Quality
LOS c

48 Which of the following best describes a responsibility of the SEC?

28 2019 Level I Mock Exam (C) PM

B US GAAP or under IFRS.

C US GAAP with voluntary supplemental reporting under IFRS.

for foreign private issuers.

LOS c

C is correct. The joint conceptual framework project aims to develop accounting stan-dards based on principles in an attempt to achieve consistency in financial reporting approaches and judgments while trying to limit the range of acceptable answers.

2019 Level I Mock Exam (C) PM 29

51 A cell phone manufacturer has switched to high- margin premium- priced products with the most innovative features as part of its product differentia-tion strategy. Which of the following other changes is most consistent with this strategy?

C is correct.

B is available under both US GAAP and International Financial Reporting Standards.

End of Year

A is correct. The fair value model would be used for the investment property, and the €100 thousand gain should be recognized on the company’s income statement. The revaluation model would be used for the plant, and the €200 thousand gain should be recognized in the revaluation surplus account on the balance sheet with no impact on net income. Therefore, only the €100 thousand will affect net income.

B is incorrect. The revaluation model would be used for the plant, and the gain should be recognized in the revaluation surplus account on the balance sheet. This is a new purchase and therefore no gains need to be recognized on the income statement to reverse previously recognized losses. Therefore, a maximum of $100,000 would be recognized on the income statement.

B. Operating Lease Commitments as of 31 December 2014 (€ millions)

If the company were to capitalize its long- term leases, its adjusted long- term

debt- to- assets ratio as of the end of December 2014 would be closest to:

Adjusted total assets: 20,097 + 710 = 20,807

Adjusted long- term debt/asset ratio: 2,057/20,807 = 9.9%

B is incorrect. Adding PV(Operating lease) only to debt: 2,057/20,097 = 10.2%. C is incorrect. The undiscounted total commitments are added to both assets and long- term debt:
Adjusted debt ratio = (1,347 + 840)/(20,097 + 840) = 10.4%
Long- Lived Assets
LOS o
Section 9.2.1
Non- Current (Long- Term) Liabilities
LOS h, i
Section 3.2.1

58 A company that provides cruise ship vacations uses term loans to finance the acquisition of new cruise ships. Which of the following is most likely a negative covenant for the loans? The company must:

B market value.

Understanding Balance Sheets
LOS e
Section 5.1
Non- Current (Long- Term) Liabilities
LOS a

62 The post- audit performed as part of the capital budgeting process is least likely to include the:
A provision of future investment ideas.
B rescheduling and prioritizing of projects.
C indication of systematic errors.

63 Which of the following is most consistent with good corporate governance practices?

65 Given the following information about a firm:

B 7.5%.

C 10.3%.

The weight for equity is one minus the weight of debt: 2/3 = 1 – (1/3).

WACC = weight of debt × cost of debt × (1 – tax rate) + weight of equity × cost of equity
= (1/3) × 0.08 × (1 – 0.40) = (2/3) × 0.13
= 0.1026 = 10.3%

66 Which of the following is mostlikely considered an example of matrix pricing when determining the cost of debt?

A Debt- rating approach only.

67 A company recently issued a 10- year, 6% semiannual coupon bond for $864. The bond has a maturity value of $1,000. If the marginal tax rate is 35%, the after- tax cost of debt (%) is closest to:
A 3.9%.

C is incorrect. If the after- tax cost for six- month yield is used, the result will be 0.04(1 – 0.35) = 2.6%.

Cost of Capital
LOS f

38 2019 Level I Mock Exam (C) PM

B is incorrect because it uses the 60% debt financing instead of the D/E ratio: 1 0072 = 1 4 1 + ( 1−0 35 60 ) %

Cost of Capital
LOS i
Section 4.1

B is correct. The WACC does not necessarily increase as more funds are being raised. Higher amounts of funding would not change the WACC if everything were in proportion to the old target capital structure. It is the changes in relative proportions of sources of funding that could make a difference because of interest deductibility and financial risk.

70 An inventory system that reduces average inventory without affecting sales will most likely reduce the:
A quick ratio.

B inventory turnover.

A is incorrect. Quick ratio will increase as the result of efficient inventory system.

B is incorrect. Inventory turnover will increase as the result of efficient inventory system.

71 The degree of financial leverage (DFL) is closest to:
A 2.6.
B 1.5.
C 1.7.

72 If a 90- day $10,000 US Treasury security is selling for $9,870, the discount- basis yield is closest to:
A 5.27%.

73 The annual cost of trade credit assuming a 365- day year for terms 3/10 net 40 is closest to:
A 43.3%.
B 44.9%.

C is incorrect because the “number of days beyond discount” is set to 40. A is incorrect because (1 + 3%) is the rate being compounded.

75 ABC Company has an obligation to pay a certain amount each month to each of its employees after they retire. This obligation is most likely known as a(n): A endowment.

76 With respect to the portfolio management process, the execution step most likely includes:
A portfolio monitoring.
B asset allocation.

77 If Investor A has a lower risk aversion coefficient than Investor B, on the capital allocation line, will Investor B’s optimal portfolio most likely have a higher expected return?

A Yes
B No, because Investor B has a higher risk tolerance
C No, because Investor B has a lower risk tolerance

2019 Level I Mock Exam (C) PM 43

80 Which of the following portfolio performance measures are the most appropri- ate for an investor who holds a fully diversified portfolio?
A Sharpe ratio and Treynor ratio.

A is incorrect. The Treynor ratio is appropriate for an investor who holds a fully diver-sified portfolio, but the Sharpe ratio is appropriate for an investor who does not hold a fully diversified portfolio.

C is incorrect because these measures are appropriate for an investor who does not hold a fully diversified portfolio.

44 2019 Level I Mock Exam (C) PM

V0 = value of a share of stock today
D1 = expected dividend in year 1 = current dividend (D0) × (1 + g) r = required rate of return on the stock

B It is advantageous to use asset- based valuation approaches rather than forward- looking cash flow models in the case of companies that have signifi-cant intangibles.

A Growth
B Mature
C Embryonic

87 Which of the following situations will most likely promote an increase in market efficiency?

Market Efficiency
LOS c

B is correct. A momentum anomaly occurs when securities that have experienced high short- term returns continue to generate higher returns in subsequent periods. Therefore, if a trader can obtain persistent abnormal returns by adopting an investment strategy that purchases stocks that have recently experienced high returns, then he or she is exploiting a momentum anomaly.

89 A market has the following limit orders standing on its book for a particular stock:

A is correct. The limit buy order will be filled first with the most aggressively priced limit sell order and will be followed by filling with the higher priced limit sell orders that are

Market Organization and Structure
LOS h

91 A trader seeking to sell a very large block of stock for her client will most likely execute the trade in a(n):
A quote- driven market.
B order- driven market.

92 The advantages to an investor owning convertible preference shares of a com- pany most likely include:
A less price volatility than the underlying common shares.

B an opportunity to receive additional dividends if the company’s profits exceed a pre- specified level.

A is correct. The performance of commodity indexes can be different from their underlying commodities because the indexes consist of futures contracts on the commodities rather than the actual commodities. Commodity index returns reflect the risk- free interest rate, the changes in future prices, and the roll yield.

Security Market Indexes
LOS j

50 2019 Level I Mock Exam (C) PM

B Eurobond.

C is incorrect because global bonds are bonds that are issued simultaneously in the Eurobond market and in at least one domestic bond market.

Fixed- Income Securities: Defining Elements
LOS d

97 What type of risk most likely affects an investor’s ability to buy and sell bonds in the desired amounts and at the desired time?

A Market liquidity
B Spread
C Default

2019 Level I Mock Exam (C) PM 51

98 In a securitization, the seller of the pool of securitized assets is the: A trustee.

B special purpose entity.
C depositor.

99 Which of the following is least likely a feature of a credit card receivable ABS? A An early amortization provision
B Amortizing collateral

C is incorrect because a credit card receivable ABS would typically have a lockout period during which the cash flow that is paid out to security holders is based only on finance charges collected and fees.

Introduction to Asset- Backed Securities
LOS h

52 2019 Level I Mock Exam (C) PM

A is incorrect because it uses the annual discount rate and the maturity in years rather than adjusting the discount rate and maturity for semi- annual periods.

C accrued interest plus the agreed- on bond price.

102 A bond has a 10- year maturity, a $1,000 face value, and a 7% coupon rate. If the market requires a yield of 8% on similar bonds, it will most likely trade at a: A discount.

B premium.

bonds with higher coupon rates face higher reinvestment risk. The higher the coupon rate, the more dependent the bond’s total dollar return will be on the reinvestment of the coupon payments in order to produce the yield to maturity at the time of purchase.

B is incorrect because, all else being equal, a bond selling at a discount has a lower coupon rate than a bond selling at a premium.

B lower.

A is incorrect because in a falling interest rate environment the effective duration of a callable bond will be lower, not higher, than the effective duration of a comparable non- callable bond.

C is incorrect because in a falling interest rate environment the effective duration of a callable bond will be lower than the effective duration of a comparable non- callable bond.

C 3.25%.

54 2019 Level I Mock Exam (C) PM

106 A long- term bond investor with an investment horizon of 8 years invests in option- free, fixed- rate bonds with a Macaulay duration of 10.5. The investor most likely currently has a:

A Differences in risk aversion
B Transaction costs
C Inaccurate forecasts

108 Over time, a forward contract most likely has variable:
A value and constant price.
B price and constant value.
C value and variable price.

109 The underlying in a forward rate agreement is most likely a(n): A growth rate of an equity index.
B interest rate.

111 Which of the following derivatives is least likely to be classified as a contingent claim?

C is incorrect. A credit default swap is a contingent claim in which the credit protec-tion seller provides protection to the credit protection buyer against the credit risk of a third party.

Derivative Markets and Instruments
LOS b

C swap.

113 In an efficient market, it is more likely that fundamental value will be reflected in the:
A underlying spot market before the derivative market.

A is incorrect. In an efficient market, the derivatives market (not the underlying spot market) is more likely to reflect fundamental value because derivatives contracts require less capital, have lower transaction costs, and are easier to sell short.

B is incorrect. In an efficient market, the derivatives market is more likely to reflect fundamental value before the underlying spot market because derivatives contracts require less capital, have lower transaction costs, and are easier to sell short.

116 Concentrated portfolio strategies are attractive because of their: A potential to generate alpha.
B ability to track market indices.
C low risk.

B distressed/restructuring.

C quantitative directional.

119 A private equity firm sells a portfolio company to a buyer that is active in the same industry as the portfolio company. This transaction is best described as a(n):
A trade sale.

C high- water mark provision.