2015 Level I Mock Exam Afternoon Questions

© 2015 Passed Tense / Adapt Prep

June 2015

CFA Level I Mock Exam Afternoon Session

The afternoon session of the June 2015 Level I Chartered Financial Analyst (CFA®) Mock Exam has 120 questions. 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.

Questions Topic Minutes

121 – 138 Ethical and Professional Standards 27

139 – 153 Quantitative Methods 22.5

154 – 165 Economics 18

166 – 189 Financial Reporting and Analysis 36

190 – 197 Corporate Finance 12

198 – 209 Equity Investments 18

210 – 215 Derivatives 9

216 – 227 Fixed Income Investments 18

228 – 231 Alternative Investments 6

232 – 240 Portfolio Management 13.5

Total 180


Question 121 through 138 relate to Ethical and Professional Standards. 121. Remy, CFA, manages investments for several oil companies. These firms are fairly

profitable, even though they pay a sizable share of their revenue in tariffs. Because politics is such an important aspect of the companies' success, Remy maintains relations with Congressman Frank and his wife Claire. Claire runs a not-for-profit charity which provides clean water to communities in Africa. In advance of an upcoming relevant energy bill vote, Remy offers to donate $1.5 million to Claire's organization, but Claire rejects the donation. Has Remy most likely violated the Standards? A. Yes B. No, because the donation didn't benefit Frank directly C. No, because he didn't give any gift

122. Rodger Aaron, CFA, is another independent investment analyst. Rodger's reports contain 4

sections: Buy, Hold, Sell, and Watch. While reviewing Province Agriculture's (PA) financial statements, Rodger finds an error in the reports. He asks his friend Nelson Cobb to review his work, and Nelson agrees. This would have a material negative effect on PA's financials and their reputation. However, the contacts at PA are easy to work with and consistently provide Rodger information needed for his analysis. If he mentions the error, they may not be so friendly in the future. Other companies may also be leery and follow suit. Someone will find the error, and Rodger doesn't want to get involved with the media or politics. He adds PA to his Watch list, with the note: "Province is consistently growing. They seem to be a likely buy target. Something feels wrong, though. I can't pull the trigger." Has Rodger most likely violated the Standards? A. Yes, by omitting relevant information B. Yes, by not notifying authorities C. No


123. Peter Ryun, CFA, is working with his supervisor in developing a compliance handbook for

the staff. Which of the following are not recommended procedures for compliance for the Misconduct standard?

I. Global diversification

II. Asset class diversification III. Avoiding overinvestment in one's employer's stock

A. II only B. III only C. All are recommended

124. Toni Witten, CFA, is a portfolio manager for Jones Enterprises. Most of Toni's work

involves client facing, and she doesn't exercise control over operations. Toni does manage her own money outside of work as a hobby. One day, Toni subscribed to an analyst report issued by Dez Romo, CFA. Dez is a popular analyst, and her reports can impact the market. Toni is concerned about investing based on Dez's advice, because only paid subscribers have access to these reports. Assume that the reports are developed consistently with the Standards. Is Toni most likely violating the Standards by investing as a result of the reports? A. Yes B. No, because the reports are considered immaterial C. No, even though the reports are considered private and material

125. Isaiah West, CFA, issues weekly analysis reports on medical stocks. In Isaiah's last report,

he issued the following BUY rating for Clear Lean Electrics (CLE): From blog reports, several hospitals have switched to CLE's products. The writers seem happy with the products and are recommending CLE to their colleagues. However, CLE's stock price hasn't moved significantly in months. Strong buy. Though he didn't mention it in his report, Isaiah viewed the proper price for CLE at $23. His report was popular and the stock increased to $25. Isaiah was surprised with his report's popularity and the increase in CLE's price. After the increase, Isaiah shorted the security in his portfolio, intending to sell after the earnings report is released. Has Isaiah most likely violated the Market Manipulation Standard? A. Yes, unless he sends an updated report to all original recipients first B. Yes, because he may personally gain from misuse of his advice C. No


126. Christine Michaels, CFA, has $300M assets under management. Many of these assets are individual stocks with voting rights. Which of the following proxy voting strategies least likely violates the Loyalty, Prudence, and Care Standard? A. Avoiding casting any votes B. Casting votes consistently with her corporate proxy voting expert's advice C. Voting consistently with management

127. Goldy Johnson, CFA, has managed assets at Michigan Blue, Inc. for 20 years. Next month,

Detroit Felines, will be issuing their initial public offering (IPO). Three of Goldy's clients want to buy into Detroit Felines: 1. George Cord, an automobile manufacturer, 10,000 shares 2. Bernard Robertson, a local businessman, 5,000 shares 3. Erika Johnson, Goldy's sister who is investing through Michigan Blue, 3,000 shares

However, Detroit Felines is oversubscribed. Goldy will only be able to buy 1,200 shares of Detroit Felines. Which of the following allocations is most consistent with the Standards?

Option George Cord Bernard Robertson Erika Johnson 1 700 300 200 2 400 400 400 3 800 400 0

A. Option 1 B. Option 2 C. Option 3

128. Tom Gronkowski, CFA, manages assets for Dani Edelman. Specifically, Tom oversees

Dani's international assets ($3M). The rest of Dani's portfolio ($15M) is managed by Tom's colleagues at Boston Loyalty. Dani also has $5M assets in a Swiss bank account that she did not disclose to Tom when he asked her about any other funds. According to the Standards, Tom is most likely responsible for managing Dani's international assets: A. As a self-contained portfolio B. With respect to all Dani's assets at Boston Loyalty C. With respect to all of Dani's assets

129. In order to satisfy the Performance Presentation Standard, compliance with the Global

Investment Performance Standards (GIPS) is: A. sufficient but not necessary B. necessary but not sufficient C. both necessary and sufficient


130. Gina Decker, CFA, recently started working as an investment analyst for New Transports. Gina recommends fixed income securities to the portfolio manager, Jace Ivory. Unfortunately, Jace and Gina have had a fair amount of conflict in the short time. Gina is concerned that Jace, who is not affiliated with the CFA Institute, is not following the supervisor duties of the Standards. Which of the following is Gina required to do in accordance with the Loyalty Standard? A. Provide Jace with a copy of the Code of Conduct and Standards B. Put New Transport's interests ahead of her own in all matters C. Avoid behavior that harms New Transport's interests

131. Ben Bell, CFA, recently left his employer, Steel and Mines Investing (SMI), for a

competitor, Nevermore. Ben brought a printed copy of two portfolios he created for SMI clients as guidance at Nevermore. Only the stock list and weights were printed; no client information was kept. Upon arriving at Nevermore, Ben contacted his former clients using phone numbers he found online. Three of those clients switched to Nevermore immediately. How did Ben most likely violate the Standards? A. Only by bringing the portfolio printouts B. Only by contacting former clients C. Both by bringing the printouts and by contacting former clients

132. Which of the following attributes do the handbook recommend analysts consider in their

investment recommendations?

I. The firm's operational history II. The industry business cycle

III. Limitations of quantitative models

A. I and II only B. II and III only C. I, II, and III

133. Vincent Wu, CFA, presented a proposal to a perspective client. The pitch discussed

historical returns and concluded with:

"If you invest your money with us, your account should grow 5% each year."

There was no disclaimer or mention that the 5% number is based on subjective assumptions. Which Standard has Vincent most likely violated? A. Diligence and Reasonable Basis B. Communication with Clients and Prospective Clients C. Loyalty


134. Russell Harvin, CFA, just finished an analysis report on fixed income stocks. The report contained 4 buy recommendations and 6 sell recommendations, in addition to commentary on recent central bank actions. Russell's firm, Sea Holdings, has a policy to keep electronic records for 5 years. There is no legal regulation on record retention. Suppose Russell archives his electronic notes for 5 years, then deletes them. Has Russell most likely violated the Standards? A. Yes, because he didn't store the records in hard copy B. Yes, because he didn't maintained records for 7 years C. No

135. Jordan Morris, CFA, has $500M under management at her investment firm. Most of the

investment originates from institutional investors. One of her clients, Red Basin, needs short-term liquidity. Jordan sells Red Basin's $5M holding of Gruden, Inc. This transaction is sufficient to change the market, and the price of Gruden immediately decreases 2%. None of Jordan's clients are in position to take advantage of the price drop. Jordan adds 200 shares of Gruden to her personal account an hour later. Has Jordan most likely violated the Standards? A. Yes B. No, if Red Basin still has a diversified portfolio C. No, if Jordan acted in the best interests of her clients

136. Michelle Wong, CFA, manages assets for a dozen small accounts. All her transactions are

brokered through Woods Brothers. Because of the volume, Woods gives Michelle's clients a small discount on transaction fees. Woods also pays 5% of its fees back to Michelle's employer, who reports those fees as revenue. Has Michelle most likely violated the Referral Fees Standard? A. Yes B. Only if she doesn't disclose the fees to her clients C. No

137. Which of the following are least likely required to maintain you active membership in the

CFA Institute each year? A. Complete your credits in the Continuing Education (CE) program B. Pay your dues C. Sign and submit the Professional Conduct Program

138. Which of the following is the most appropriate use of the CFA mark?

A. Bobbi Martin, C.F.A. B. Bobbi Martin is a candidate in the CFA Program C. Bobbi Martin is a CFA-type analyst


Question 139 through 153 relate to Quantitative Methods. 139. In exactly two years, Alan will receive a payment of $5,000. Every two years after the first

payment, he will receive payments that are 20 percent greater than the previous payment. Alan will receive a total of four payments. If Alan can earn 6 percent annually on his investments, the present value of the four payments at the end of the first year is closest to: A. $19,700 B. $20,880 C. $22,130

140. Beaufort, Inc. is planning to purchase new machinery for its plant. The machine costs $5

million to purchase and install. The machine is expected to generate $800,000 of cash inflow at the end of each year for the next ten years. The machine will be sold at an estimated $500,000 at the end of the tenth year. At a discount rate of 10 percent per annum, the net present value of this project is closest to: A. $90,900 B. $108,400 C. $371,300

141. If the effective annual yield is 11 percent, the present value of a cash flow of $800 to be

received in 90 days is closest to: A. 720 B. 750 C. 780

142. The table below contains statistics for 3 portfolios.

Mean Return (%)

Standard Deviation (%) Skewness Kurtosis

Portfolio X 21.5 41.8 -4.792 10.117 Portfolio Y 15.8 28.0 -2.662 8.001 Portfolio Z 4.6 9.8 -1.940 5.323

Based only on the information given in the table, which portfolio has the highest coefficient of variation? A. Portfolio X B. Portfolio Y C. Portfolio Z

143. The observations in a set of data have different values. Which of the following statements

best describes the data? A. arithmetic mean < geometric mean < harmonic mean B. arithmetic mean ≥ geometric mean ≥ harmonic mean C. arithmetic mean > geometric mean > harmonic mean


144. The probability that Stock X increases in value after one year is 0.7. The probability that Stock Y increases in value after one year is 0.5. The probability that at least one of Stock X and Y increases in value after one year is 0.9. The probability that exactly one of Stock X and Y increase in value after one year is closest to: A. 0.4 B. 0.6 C. 0.8

145. The covariance matrix for the returns of three assets is given:

Asset A B C A 0.3 0.2 0.2 B 0.2 0.6 0.1 C 0.2 0.1 0.8

The variance of portfolio return for a portfolio that contains all three assets in equal weights is closest to: A. 0.3 B. 0.5 C. 0.9

146. You manage a portfolio of ten stocks. Each stock independently has a 35 percent

probability of yielding a positive return. The probability that at least two stocks yield a positive return is closest to: A. 0.91 B. 0.94 C. 0.97

147. You are given the following closing prices for a stock.

Date Closing Price (¥) 31 December 2001 1,065 31 December 2002 1,001 31 December 2003 1,213 31 December 2004 1,684

The mean continuous compounded annual return for the stock is closest to: A. 15.3% B. 17.3% C. 19.4%

148. A researcher would like to gather a sample of fifty humans. He divides the range of human

height into ten intervals of equal length and randomly selects five humans from each interval. This is an example of: A. simple random sampling B. systematic sampling C. stratified sampling


149. Which of the following statements is true? A. Relative to the normal distribution, a 𝑡-distribution is more peaked and has a thinner

tail. B. Relative to the normal distribution, a 𝑡-distribution is less peaked and has a thinner tail. C. Relative to the normal distribution, a 𝑡-distribution is less peaked and has a fatter tail.

150. An analyst tracks the annual returns for two portfolios, A and B, for 30 years. These

portfolios are rebalanced annually and are almost identical in various risk measures. Therefore, their returns are deemed dependent. The average of difference in returns over 30 years is −0.82 percent. The sample standard deviation of differences is 1.41 percent. The analyst would like to test if the mean difference is equal to 0. The appropriate test statistic for this hypothesis test is closest to: A. −3.2 B. −0.6 C. 3.2

151. Which of the following is true regarding a candlestick chart?

A. A dark body indicates the close price is higher than the open price. B. A candlestick with no lower wick and a white body indicates the stock closed at the low

price. C. A candlestick with no upper wick and a white body indicates the stock closed at the

high price of the day. 152. Emma, a technical analyst, notices that the stock price for Cooper Technology over the past

month follows the classic head and shoulder pattern with a neckline of £133 and a peak of £171. Today’s close price is £129. The price target that Emma should estimate is closest to: A. £87 B. £91 C. £95

153. The phenomenon where a short-term moving average crosses a long-term moving average

from below is known as the: A. golden cross B. silver cross C. dead cross

Question 154 through 165 relate to Economics. 154. The price of bread has demand function given by the equation 𝑄! = 24− 2𝑃 and supply

function given by the equation 𝑄! = −1.2+ 0.8𝑃. The equilibrium quantity is 6. If the government imposed a price ceiling of 6.5, the amount of deadweight loss that would result from the price ceiling is closest to: A. 3.5 B. 7.0 C. 17.5


155. Which of the following statements is most likely true?

A. If the price elasticity of demand is negative, then the demand curve slopes downward. B. If the income elasticity of demand for a good is positive, then the good is classified as

an inferior good. C. If the cross-price elasticity of demand between two goods is negative, then the two

goods are classified as substitutes. 156. Leonard’s marginal rate of substitution of blackberries for strawberries is 2. The number of

blackberries that he will be willing to trade in exchange for 10 strawberries is closest to: A. 5 B. 10 C. 20

157. A firm operating with perfect competition will most likely stop production in the long run

but still meet its fixed costs obligations in the short run when: A. average revenue is less than average fixed cost B. average revenue is less than average total cost C. average revenue is less than average variable cost

158. A mobile phone manufacturer employs unskilled, semi-skilled, and skilled workers. The

marginal revenue product of unskilled workers is lower than that of semi-skilled and skilled workers. The equilibrium wages for unskilled, semi-skilled, and skill workers are $60 per day, $120 per day, and $300 per day. The government passes a law to raise the minimum wage to $80 per day. The manufacturer will most likely respond to this new law by: A. employing more unskilled workers B. employing fewer unskilled workers C. no response

159. Firms operate with perfect competition in a market. The demand schedule for the market is

given by 𝑃 = 42− 3𝑄, where 𝑄 ≠ 0. The long-run average cost and marginal cost of each firm are 3𝑄! − 18𝑄 + 7 and 9𝑄! − 36𝑄 + 7, respectively. The long-run competitive equilibrium most likely occurs at a price of: A. 14 B. 23 C. 33


160. Japanese workers who are paid ¥1,500 per hour are able to produce 200 calculators per hour. The workers develop a new technique to increase production to 300 calculators per hour. In addition, wages per hour increase by 20%. Which of the following is most accurate? A. The short-run aggregate supply curve will shift to the left and the long-run aggregate

supply curve will shift to the left. B. The short-run aggregate supply curve will shift to the right and the long-run aggregate

supply curve will shift to the left. C. The short-run aggregate supply curve will shift to the right and the long-run aggregate

supply curve will shift to the right. 161. Early in a recovery, inventory levels tend to:

A. rise as companies increase production to accommodate an increase in sales B. fall as companies try to increase profit after the recession C. fall as sales pick up but companies are slow to increase production

162. You are given the following aggregate price levels for Country X over a 10-year period.

Year Consumer Price Index 2004 112 2005 715 2006 819 2007 903 2008 951 2009 969 2010 978 2011 983 2012 987 2013 989

Which of the following is least accurate? A. Country X has experienced disinflation during this 10-year period. B. Country X has experienced deflation during this 10-year period. C. Country X has experienced hyperinflation during this 10-year period.

163. The government of Country Z raised government spending by $20 billion. This caused total

incomes and spending to increase by $52 billion. If the net tax rate is 30%, the marginal propensity to save is closest to: A. 0.12 B. 0.62 C. 0.88


164. Country A and Country B are neighboring countries. They have eliminated all barriers to the flow of goods and services and created a common trade policy against all other countries. However, they do not allow the free movement of factors of production, do not have common economic institutions, and do not coordinate economic policies between them. Country A and Country B are most likely a part of a: A. free trade area B. common market C. customs union

165. You are given the following information:

• The KRW/GBP spot exchange rate is 1,743.36. • The KRW interest rate is 1.10%. • The GBP interest rate is 1.15%. • Interest rates are quoted on a 360-day year basis. The 180-day forward points in KRW/GBP is closest to: A. 43 B. −43 C. −4,300

Question 166 through 189 relate to Financial Reporting and Analysis. 166. Which of the following statements is most accurate?

A. The income statement presents information on a company’s current financial position. B. The balance sheet presents information on the profitability of a company’s business

over a period of time. C. Comprehensive income includes all items that impact owner’s equity but are not the

result of transactions with shareowners. 167. On 1 July 2014, SALT Solutions paid $100,000 in wages to its employees 3 months in

advance. This transaction would most likely result in: A. no change in net assets B. a decrease in net assets C. an increase in net assets

168. At the end of an accounting period, 7Verbs Inc. has not paid cash for an expense that it has

incurred. 7Verbs should record: A. an accrued revenue B. an accrued expense C. a deferred expense

169. Which of the following is least likely a characteristic of an effective financial reporting

framework? A. Consistency B. Timeliness C. Transparency


170. Orange Inc. is a manufacturer of electronic appliances. At the beginning of 2014, it purchased a machine for $750,000. The estimated useful life of the machine is 6 years. The estimated residual value of the machine is $40,000. Assuming Orange Inc. uses the accelerated method of depreciation with an acceleration factor of 250 percent, its depreciation expense for 2016 is closest to: A. $106,337 B. $136,718 C. $182,292

171. For the year ended 31 December 2014, MFE Inc. reported net income of $3 million. The

company declared and paid $200,000 of dividends on preferred stock. The company had a weighted average of 600,000 common shares outstanding from the beginning of the year. The average market price of the company’s stock for the year was $50. The company also had 50,000 warrants outstanding with an exercise price of $30 per share. If the market price of the company at year end was $60 per share, the company’s diluted EPS is closest to: A. 4.20 B. 4.52 C. 4.60

172. The average quick ratio for an industry is 4.80. The following information is available for a

company in the industry:

As at December 31 $ ‘000s Cash and cash equivalents 3,000 Short-term marketable securities 300 Accounts receivable 1,500 Inventory 400 Accounts payable 650 Taxes payable 200 Installment loan payable, due in four equal annual payments on October 31. 800

Long term bonds payable 50

Using the quick ratio, when compared with the industry, the firm is best described as being: A. as liquid B. less liquid C. more liquid

173. Which of the following financial assets is most likely measured at amortized cost?

A. Held-to-maturity investments B. Held-for-trading investments C. Available-for-sale investments


174. An analyst has gathered the following company information:

Net income $3,000 Depreciation $250 Interest expense $125 Fixed capital expenditures $1,500 Working capital expenditures $275 Net debt repayment $25 Net borrowing $1,250 Tax rate 30%

The company’s free cash flow to firm (FCFF) and free cash flow to equity (FCFE) are closest to: FCFF FCFE A. $1,563 $2,700 B. $2,700 $1,563 C. $1,563 $2,725

175. An analyst has compiled the following company information:

$ millions Cash flow from operating activities 104.4 Cash flow from investing activities (10.8) Cash flow from financing activities 54.5 Interest paid (included in CFO) 20.2 Taxes paid 16.0

The cash flow interest coverage ratio for the year is closest to: A. 5.96 B. 6.96 C. 8.33

176. An analyst has gathered the following company data:

2014 2013 Inventory turnover 11.4 10.7 Receivables turnover 13.0 14.6 Payables turnover 9.1 10.4

Based on this data, the analyst would least likely conclude that: A. management of inventory has contributed to improved liquidity. B. management of receivables has contributed to improved liquidity. C. management of payables has contributed to improved liquidity.


177. In order to examine a company’s ability to meet short-term obligations, which of the

following ratio would an analyst most likely examine? A. Working capital turnover B. Defensive interval ratio C. Debt-to-equity ratio

178. Compared to a company that uses the LIFO method, during periods of falling prices and

stable inventory quantities, a company that uses the FIFO method will least likely have: A. higher profitability ratios B. higher solvency ratios C. higher activity ratios

179. An analyst gathers the following company information:

Cost of ending inventory $213,000 Estimated selling price $220,000 Estimated selling cost $8,000 Current replacement cost $199,000 Normal profit margin $1,000

The company’s inventory assuming IFRS and U.S. GAAP is closest to: IFRS U.S. GAAP A. $212,000 $199,000 B. $212,000 $211,000 C. $213,000 $211,000

180. Which of the following will most likely result in a smaller annual depreciation amount?

A. Longer useful life and lower expected residual value B. Longer useful life and higher expected residual value C. Shorter useful life and higher expected residual value

181. MLC Inc. elected to use the revaluation model for its machinery. The company purchased a

machine at the end of 2012 for $25,000. The machine’s fair value at the end of 2013 is $27,000. The machine’s fair value at the end of 2014 is $22,000. The revaluation surplus and change to the company’s income statement as a result of the revaluation at the end of 2014 are closest to: Revaluation Surplus Income Statement A. -$5,000 0 B. 0 -$5,000 C. 0 -$3,000


182. Divergent Company purchased equipment for $15,000. To depreciate the equipment, the

company uses the straight-line depreciation method with an estimated residual value of zero for both accounting and tax purposes. For accounting purposes, the equipment is depreciated over 5 years. For tax purposes, the equipment is depreciated over 3 years. The statutory tax rate is 30%. The amount of deferred tax liability (DTL) or deferred tax asset (DTA) recognized on the balance sheet at the end of the second year is closest to: A. $1,200 DTA B. $1,200 DTL C. $4,000 DTL

183. A permanent difference will most likely occur when:

A. the timing of tax payments is uncertain B. the amount of tax payments is uncertain C. accounting standards require recognition of an expense that is not permitted under tax

laws 184. Compared to using a capital lease, a lessee that uses an operating lease will most likely

report higher: A. cash flow from operating activities B. cash flow from investing activities C. cash flow from financing activities

185. Which of the following least accurately describes a defined benefit plan?

A. The amount of pension that is ultimately paid by the plan depends on the performance of the plan’s assets.

B. The employer promises to make periodic payments to employees after retirement. C. If the present value of the estimated pension obligation exceeds the fair value of the

fund’s assets, the employer’s balance sheet will reflect a net pension liability. 186. Which of the following is least likely a common accounting warning sign?

A. Excessive use of operating leases by lessees. B. Use of long useful lives for depreciation and amortization C. Unusually high revenues in the final quarter that can be attributed to seasonality.

187. Which of the following will least likely occur to a company with constant sales delays

payment to its vendors? A. An increase in account payables B. An increase in cost of goods sold C. An increase in days sales in payables


188. Which of the following is least likely assessed in a credit analysis?

A. Character B. Covenant C. Contribution

189. Which of the following is least likely to be used to screen for attractive equity investment?

A. Low price-to-cash flow ratio B. Higher-than-average return on assets C. High price-to-earning ratio

Question 190 through 197 relate to Corporate Finance. 190. TKT Inc. is considering investing in two projects, Project I and Project II. Project I and

Project II requires an initial outlay of $5 million and $4.5 million respectively. The two projects are expected to generate the following cash flows:

Year Project I ($ millions) Project II ($ millions)

1 1.5 1.2 2 2.4 2.2 3 2.6 2.4 4 2.2 3.0

Assuming the required rate of return on the investment is 26%, which project should the company choose to invest? A. Project I only, because the IRR for Project II is less than the required rate of return. B. Project II only, because the IRR for Project I is less than the required rate of return. C. Both Project I and Project II, because the IRR for both projects are more than the

required rate of return. 191. TKT Inc. is considering investing in a project located at an emerging country. An analyst

has gathered the following information:

• The yield on the emerging country’s U.S. dollar-denominated 10-year government bond is 7.0%.

• The yield on 10-year U.S. Treasury bond is 4.8%. • The annualized standard deviation of the emerging country index is 25%. • The annualized standard deviation of the emerging country’s U.S. dollar-denominated

10-year government bond is 16%. • The appropriate beta for the project is 1.4. • The market risk premium is 8%. • The risk-free interest rate is 6%.

The appropriate country risk premium and the cost of equity that TKT should use for the project in the emerging country are closest to:


Country Risk Premium Cost of Equity A. 0.014 0.172 B. 0.014 0.192 C. 0.034 0.220

192. An analyst gathered the following data about a company:

Source of Capital Book Value ($ millions) Market Value ($millions) Debt 27 20 Preferred stock 18 28 Common stock 45 32

• Before-tax cost of debt = 6% • Cost of common equity = 8% • Cost of preferred equity = 10% • Marginal tax rate = 30%

The company’s weighted average cost of capital is closest to: A. 0.073 B. 0.078 C. 0.082

193. The unit contribution margin for a product is $20. Assuming fixed operating costs of

$800,000 and 100,000 units of the product have been sold, a 15% increase in the number of units sold will increase the operating income by: A. 1.7% B. 16.7% C. 25.0%

194. The components of business risk most likely include:

A. operating risk and sales risk B. operating risk and financial risk C. sales risk and financial risk

195. If a company finances its share repurchase by borrowing at an after-tax borrowing rate that

is lower than the company’s earning yield, the earning per share of the company going forward will most likely: A. increase B. decrease C. remain unchanged


196. The purchaser of the stock will not receive the dividends if the stock was bought on or after

the: A. declaration date B. ex-dividend date C. holder-of-record date

197. Which of the following will least likely cause a drag on liquidity?

A. Uncollectable receivables B. Tight short-term credits C. Obsolete inventory

Question 198 through 209 relate to Equity Investments. 198. Which of the following financial intermediaries are most likely to add risk to their

portfolio? A. Insurance companies B. Arbitrageurs C. Depository institutions

199. Jamie Wilson sells 20 out-of-the-money put contracts on Blackboards Inc. Each contract is

for 1,000 shares of the underlying. Jamie will be exposed if the price of Blackboards A. Decreases B. Increases C. Remains level

200. Which of the following market types most likely requires matching rules?

A. Order-driven markets B. Quote-driven markets C. Brokered markets

201. The T&Q 450 index starts at a price of £5,000. For the first 3 years, the index has returns of

20%, 10%, and -10%. The index does not pay dividends. After 3 years, the price of the index is closest to: A. £5,950 B. £6,000 C. £6,050

202. Which index method will most likely result in a value tilt?

A. Fundamental weighting B. Market capitalization weighting C. Price weighting


203. Which of the following are least common uses of stock indexes?

A. A proxy for the market B. A method to generate alpha C. A gauge of investor confidence

204. Which of the following is least accurately considered an information-acquisition cost?

A. Research soft dollars B. Subscription to an equity database C. Broker commission

205. Various studies have shown that value stocks consistently outperform expectations.

Because these stocks can be categorized by publicly available data (dividend yield, P/E ratio, market-to-book ratios), these studies contradict Fama's semi-strong market hypothesis. How does the CFA curriculum mention Fama used this information? A. Concluding that the semi-strong market form does not hold B. Disputing the studies C. Adding a value factor to the valuation model

206. In the popular baseball movie Moneyball, Brad Pitt (playing Billy Beane), leads his players

to focus on the end goal: You get on base, we win. You don't, we lose. And I hate losing, Chavy. I hate it. I hate losing more than I even wanna win. There's a difference. Which behavioral term most accurately describes this sentiment? A. Overconfidence B. Gambler's fallacy C. Risk aversion

207. Adam Ventures (AV) has the following earnings for 2014. Numbers in millions.

• Net Income: $2.5 • Payments to preference shareholders: $0.5 • Income available to common shareholders: $2.0

AV's beginning of year stock is valued at $20 per share, with a book value of $15/share. AV has 500,000 shares outstanding.

AV's return on equity is closest to: A. 20% B. 27% C. 32%


208. The industry cycle method most typically associated with slow growth and high prices is:

A. Decline B. Embryonic C. Shakeout

209. A perpetual preferred stock pays $5 annual dividends at a par value of $100. The current

stock price is $75. The market's required rate of return on this security is closest to: A. 5% B. 7% C. 10%

Question 210 through 215 relate to Derivatives. 210. With respect to derivatives, which of the following is least accurate?

A. Derivatives generally trade at higher transaction costs than comparable spot market transactions.

B. Derivatives are often more liquid than their underlying. C. Derivatives are characterized by a relatively high degree of leverage.

211. Which of the following will least likely make futures and forward prices equivalent?

A. Interest rates are constant. B. Futures prices and interest rates are uncorrelated. C. The volatilities of future prices and forward prices are constant.

212. With respect to European call option, which of the following is least accurate?

A. The value of the option is directly related to the volatility of the underlying B. The value of the option is directly related to the risk-free interest rate. C. The value of the option is directly related to the exercise price.

213. When the price of the underlying is above the exercise price, a call option is:

A. In-the-money B. At-the-money C. Out-of-the-money

214. At expiration, American put options are worth:

A. Less than European put options. B. The same as European put options. C. More than European put options.


215. A bond is currently selling for $95 per $100 face value. A put option with an exercise price

of $100 is currently selling for $8. For a protective put, which of the following is least accurate? A. If the price of the bond at expiration is $90, the value of a short position at expiration is

$100. B. The maximum loss to a long position is $3. C. The breakeven bond price at expiration is $103.

Question 216 through 227 relate to Fixed Income Investments. 216. Shady Business (SB), an interior decorating company, needs to borrow €50 million during

the next 6 months. Which public offering method will most likely give SB the most assurance of receiving all €50 million? A. Underwritten B. Best effort C. Preferred stock

217. Which of the following statements about the relation between bid-ask spreads and liquidity

is most accurate? A. Bid-ask spreads are unrelated to a security's liquidity B. High bid-ask spreads indicate a high liquidity C. High bid-ask spreads indicate a low liquidity

218. Across The Nation (ATN) issues a 10-year bond which pays LIBOR + 50 bps. Investors

buy this bond for par. Which of the following descriptions of the bond is most accurate? A. Floating rate B. Credit-linked C. Step-up

219. Jokes 4 Evah issues the following vanilla bonds:

Bond Annual Coupon Maturity (years) Discount Rate X 5 12 7 Y 7 10 7 Z 9 11 7

Which of the following bonds is most likely trading at a discount? A. X B. Y C. Z


220. A money market security matures in 90 days at $1,000,000. With an add-on rate of 1.5%,

its price is closest to: A. $985,221 B. $996,250 C. $996,264

221. A bond pays increasing coupons until its maturity in 15 years. The bond has a Macaulay

duration of 12.8. At an annual effective interest rate of 5%, the bond's modified duration is closest to: A. 12.2 B. 12.8 C. 13.4

222. Which duration metric most accurately calculates the sensitivity of the security's value with

respect to changes in the benchmark yield curve? A. Effective duration B. Modified duration C. Macaulay duration

223. You are provided with the following information on a bond:

• Current price: 91.47 • Price if the yield increases by 2%: 76.83 • Price if the yield decreases by 2%: 109.47

The approximate convexity for the bond is closest to: A. 90 B. 100 C. 110

224. A bond has a recovery rate of 60% and a loss severity given default of $20,000. This bond's

expected loss is closest to: A. $8,000 B. $12,000 C. $20,000

225. Which of the following factors is least likely to affect a security's recovery rate?

I. Industry II. Credit Cycle

III. Seniority

A. I B. III C. All are significant


226. Which of the following is least likely to be one of Porter's five major competitive forces? A. Barrier to entry B. Level of competition C. Political and legal influences

227. Which of the following least impacts a bond's credit spread?

A. Liquidity premium B. Credit cycle C. Supply and demand

Question 228 through 231 relate to Alternative Investments. 228. Which of the following hedge fund structures are designed to benefit the limited partner

(LP)? A. Management fees B. Incentive fees C. High water marks

229. Which of the venture capital formative-stage financing occurs latest?

A. Angel investing B. Early stage financing C. Seed capital

230. As of September 5, 2014, the current price of corn is $3.60 per bushel. Farmers have

stopped asking if they will profit this year - the question now is how much will they lose for their year's work. Under which of the following 6-month futures corn prices would backwardation most likely be present? A. $3.20 per bushel B. $3.60 per bushel C. $4.00 per bushel

231. Which of the following exit strategies are least common for private equity investors?

A. Selling the company to a competitor B. Designing an initial public offering C. No exit - holding the company indefinitely


Question 232 through 240 relate to Portfolio Management. 232. After receiving the client's IPS, you run analysis and determine to put 40% of the portfolio

in domestic stocks, 30% in domestic fixed income, and 30% in international investments. You also make a proposal on the specific investments.

This analysis most accurately occurs during which step of the investment process? A. Planning B. Execution C. Feedback

233. Consider the following utility function:

𝑈 = 𝐸 𝑟 +12𝐴

Which of the following most accurately describes the bounds of 𝐴 for a risk-averse investor? A. Less than 0 B. Greater than 0 C. Greater than or equal to 0

234. Which of the following is least accurate regarding the Markowitz efficient frontier?

A. The returns from adding risk increase as you add more risk B. It contains the global minimum variance portfolio C. All optimal portfolios of risky assets are included

235. Which of the following is most accurately considered systematic risk?

A. Discovery of oil B. Threats of lawsuits C. Changes in interest rates

236. Which of the following is least accurately included in the Fama-French three-factor

model? A. Momentum factor B. Value/growth factor C. Company size factor

237. Sigmund Wallace has $1M of investable assets and a conservative investing style. Sigmund

has worked diligently accumulating his wealth and doesn't want to lose it all in the stock market. Sigmund most likely has: A. Low willingness to assume risk and high ability to assume risk B. High willingness to assume risk and low ability to assume risk C. Low willingness to assume risk and low ability to assume risk


238. A portfolio consists of two assets. There is no reduction in the portfolio risk when the correlation between the two assets is: A. -1 B. 0 C. +1

239. With respect to the indifference curve, which of the following is least accurate?

A. The slope of the indifference curve represents the additional return required by the investor to assume an additional unit of risk.

B. For two indifference curves, the indifference curve that lies further to the northwest has a higher level of utility.

C. At a given level of risk, the indifference curve for a more risk-seeking investor would have a greater slope than that of a less risk-seeking investor.

240. Which of the following will least likely have a minimum investment requirement?

A. Mutual funds B. Hedge funds C. Separately managed accounts

2015 Level I Mock Exam Afternoon Questions

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