FinQuiz.com CFA Level I 2nd Mock Exam June, 2015 Revision Copyright © 2010-2015 FinQuiz.com All rights reserved Copying, reproduction or redistribution of this material is strictly prohibited info@finquiz.com CFA Level I Mock Exam – Questions (PM) FinQuiz.com – 2nd Mock Exam 2015 (PM Session) Questions Topic Minutes 1-18 Ethical and Professional Standards 27 19-32 Quantitative Methods 21 33-44 Economics 18 45-68 Financial Reporting and Analysis 36 69-76 Corporate Finance 12 77-88 Equity Investments 18 89-94 Derivative Investments 95-106 Fixed Income Investments 18 107-112 Alternative Investments 113-120 Portfolio Management 12 Total 180 FinQuiz.com © 2015 - All rights reserved CFA Level I Mock Exam – Questions (PM) Questions to 18 relate to Ethical and Professional Standards Laura Elliot is a broker at Housegate, a broker-dealer firm She undertakes trades on behalf of clients with a high net worth She discovers that one of her clients has engaged in the embezzlement of portfolio funds, which classifies as an illegal activity under domestic trading regulations In order to comply with the CFA Institute Standards of Professional Conduct, Elliot’s preliminary course of action would be to: A request for a different assignment B report the violation to her supervisor C report the violation to regulatory authorities Standard I (A), Knowledge of the Law, requires members and/or candidates to: A document a violation when disassociating themselves from an illegal activity B have detailed knowledge of all the laws that could potentially govern their activities C abide by the rules and regulations related to the administration of the CFA examination The CFA Institute Code of Ethics requires members and candidates to: A encourage others to practice in a professional and ethical manner that will reflect credit on the profession B ensure the preservation of capital market integrity is given priority over protecting employer interests C use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities In order to comply with the CFA Institute Standards of Professional Conduct relating to duties to employers, members and candidates: A should not enter into an independent business while still employed B are encouraged to recommend that their employers adopt and distribute a code of ethics C may obtain an assurance from a subordinate who has violated the Codes and Standards that the wrongdoing will not recur FinQuiz.com © 2015 - All rights reserved CFA Level I Mock Exam – Questions (PM) Adequate compliance procedures should: A meet regulatory requirements B ensure supervisors not delegate their duties C be designed to anticipate every potential violation Samantha Town is a portfolio manager at Wallace Associates situated in Dallas, Texas This year Town has delivered exceptional performance for one of her client’s accounts In exchange for the performance, her client has offered her two front row tickets to an opera as well as the opportunity to meet the stage cast after the show To ensure she does not violate the CFA Standards of Professional Conduct, Town’s best course of action would be to: A reject the offer B Inform her employer after attending the opera show C accept the offer after obtaining permission from all relevant parties Upon reviewing the materials received during the investigation of a professional conduct inquiry, a designated officer’s preliminary course of action would be to: A revoke the member’s CFA charter B suspend the member’s membership C propose a sanction which can be rejected by the member Which of the following is a desirable practice of a firm which has a firewall policy implemented for its research and investment banking divisions? A Prohibiting communication between research and investment banking personnel B Basing the research analyst’s compensation on a flat rate without any contingent bonuses C To improve the accuracy of investment analysis, investment banking personnel regularly review research reports prepared by analysts FinQuiz.com © 2015 - All rights reserved CFA Level I Mock Exam – Questions (PM) Recommended written trade allocation procedures least likely include: A processing orders on a first-come, first-served basis B allocating trades for new issues by portfolio manager C giving all accounts participating in a block trade a weighted price based on their order value 10 Joyce Parker is a portfolio manager serving East AM Associates Parker is calculating the return generated on one of her client’s accounts for the current fiscal year She calculates the net-of-fees return but does not subtract investment management fees rendering the calculated return noncompliant with the GIPS standards East AM Associates has complied with the GIPS standards since establishment even though local laws not mandate firms to so Is Parker in violation of the CFA Institute Standards of Professional Conduct? A Yes B No, she has not violated any law C No, failure to comply with the GIPS standards does not result in a violation of the Standards of Professional Conduct 11 Ella Lawson is the chief executive at Rome Bank, a commercial banking enterprise On behalf of the bank Rome will be providing funding to a manufacturing enterprise seeking to expand its operations During her visit to the manufacturer’s factory, Lawson overhears two employees on the production floor discussing the likelihood of their employer’s inability to carry out expansion Lawson holds shares of the enterprise and decides to sell her holding and reject providing financial support Lawson is most likely in violation of the CFA Institute Standard of Professional Conduct relating to: A loyalty, prudence and care B diligence and reasonable basis C material, nonpublic information FinQuiz.com © 2015 - All rights reserved CFA Level I Mock Exam – Questions (PM) 12 Gus Horace is a real estate advisor situated in a developing country Horace is attempting to sell agricultural land, on behalf of the landowner, to a restaurant chain seeking to grow its own produce The land lies parallel to a river where industrial waste is frequently dumped In marketing the land to the potential client Horace states, ‘This s a purchase you will not regret You should more than likely expect to enjoy a healthy crop in your first year of farming.’ Horace does not disclose the fact that the original landowner is an acquaintance of his Horace is most likely in violation of the standard relating to: A fair dealing B misconduct C loyalty, prudence and care 13 Martina Gibbons is a CFA Level II Candidate, who is yet to register for the Level III exam During an interview, Gibbons makes the following two statements: Statement 1: “I have successfully completed the first two levels of the CFA exam program.” Statement 2: “The CFA program overstresses areas such as financial analysis which I believe are unnecessary at the Level I stage.” Which of the following statements most likely represents a violation of the standards relating to Responsibilities as a CFA Institute Member or CFA Candidate? A Statement only B Statement only C Both of the statements 14 A firm is eligible for claiming compliance to the GIPS standards if: A the firm, as a whole, fully meets all the requirements B it undertakes a verification of an investment management firm C it provides ancillary support to an investment management firm FinQuiz.com © 2015 - All rights reserved CFA Level I Mock Exam – Questions (PM) 15 Verification least likely serves to: A provide marketing advantages to a firm B ensure the accuracy of a performance presentation C test whether disclosure policies are designed to present performance in compliance with the GIPS standards 16 Which of the following is least likely a criterion for including a portfolio in a composite? A Ex-post criteria B Portfolio existence C Portfolio manager discretion 17 To be able to rely on the integrity of input data, the GIPS standards require firms to: A follow certain calculation methodologies B present a minimum of five years of GIPS compliant investment performance C include all actual, fee-paying portfolios in at least one composite defined by investment strategy 18 Which of the following statements is most likely correct regarding compliance with the GIPS standards? A Obtaining verification is not mandatory B The GIPS standards are comprehensive addressing unique characteristics of each asset class C Compliance with the Code of Ethics and Standards of Professional Conduct is mandatory FinQuiz.com © 2015 - All rights reserved CFA Level I Mock Exam – Questions (PM) Questions 19 to 32 relate to Quantitative Methods 19 As the degrees of freedom increases, the t-distribution’s: A peak becomes flat B tails become more fat C peak becomes narrow 20 The mean return of the Blue Enterprises’ stock is 15.5% while standard deviation is 10.3% Laura Stone has compiled probability distribution data in an exhibit for the purposes of analysis She aims to determine the probability that the stock return will neither exceed 20.0% nor decline below the mean return Exhibit Standard Normal Probability Distribution Data x or z 0.03 0.04 0.05 0.30 0.6179 0.6293 0.6331 0.6368 0.40 0.6554 0.6664 0.6700 0.6736 0.50 0.6915 0.7019 0.7054 0.7088 The probability that the stock return will be between the mean return and 20.0% is closest to: A 2% B 17% C 67% 21 GR Solutions offers investment plans to its clients Howard Isaac is one of the firm’s clients currently invested in GR’s ‘Superior Return Plan’ Isaac will require funds to construct a house two years from today The plan promises to pay $380,000 in six years from today Given a 10% discount rate, the amount of funds Isaac should be able to accumulate for the home construction is closest to: A $214,500 B $259,545 C $314,050 FinQuiz.com © 2015 - All rights reserved CFA Level I Mock Exam – Questions (PM) 22 The interest rate quoted on an investment can be viewed as: A opportunity costs of future consumption B the return forgone from current consumption C a sum of the nominal risk-free rate and premiums to compensate for distinct types of risks 23 A distribution that is positively skewed is characterized by: A a narrow peak B infrequent extreme gains C a symmetrical shaped distribution curve 24 An analyst is calculating the time series mean return for a portfolio allocated 30% to U.S equities and 70% to U.S bonds He has collected annual return data for the years 2000 to 2004 Exhibit: Stock and Bond Return Data 2000-2005 Stocks (%) Bonds (%) 2000 7.4 10.1 2001 - 5.6 3.4 2002 3.7 - 1.1 2003 9.3 7.9 2004 14.7 12.8 The time series mean return for the portfolio is closest to: A 6.4% B 9.3% C 10.4% FinQuiz.com © 2015 - All rights reserved CFA Level I Mock Exam – Questions (PM) 25 Sasha Bayle is analyzing the performance of small-cap stocks in an equity index She is forecasting how stocks will perform relative to the previous quarter in terms of the EPS generated She performs her analysis using hypothesis testing and rejects the null hypothesis in favor of the forecast that sample stocks will generate a higher EPS Several months later, Bayle discovers that the null hypothesis was in fact correct and her decision was inaccurate Has Bayle committed an error in her statistical analysis? A No B Yes, a Type I error C Yes, a Type II error 26 Construct Inc will be undertaking a $30.0 million four-year railroad expansion project in the current year In order for the project to be successful, the project must generate a profit of at least 10% of the initial cost If the project fails to so, the company’s budget committee will reduce allocations to managers for future projects (budget squeeze) The railroad expansion project estimates that the project’s net present value may run from $30.5 million on the low end and $35.0 million on the high end, with the probability of either of the two outcomes being 50% and based on a continuous uniform distribution Given the above data, the probability of a budget squeeze is closest to: A 50.0% B 55.6% C 83.3% 27 A strategy that provides a statistically significant positive mean return often: A is economically meaningful B factors risk in the decision making process C does not account for transaction costs and taxes FinQuiz.com © 2015 - All rights reserved 10 CFA Level I Mock Exam – Questions (PM) Questions 77 to 88 relate to Equity Investments 77 Pedro Lee serves a broker-dealer firm and has negotiated with Grace Arnold, the CEO of Chemco Solutions, to sell her significantly large holding of the company’s stock Lee apprehends that the order may be challenging to execute due to the size of the trade The execution mechanism that Lee should utilize is most likely: A brokered markets B crossing networks C over-the-counter markets 78 A market’s limit order book quotes the best bid and offer at 35 and 38, respectively A limit buy order with a price of 36 is placed by a trader The order will most likely: A make market B make a new market C fall behind the market 79 Jill Malcolm is studying a fundamental-weighted equity index which comprises of two stocks, A and B Stock A has a market capitalization of $450 million and earnings of $100 million Stock B has a market capitalization of $300 million and earnings of $100 million Relative to a market-weighted index, a fundamental-weighted index will: A overweight A relative to B B overweight B relative to A C make an equal allocation to the two stocks FinQuiz.com © 2015 - All rights reserved 30 CFA Level I Mock Exam – Questions (PM) 80 A fixed income analyst is studying the corporate bond sector in his country’s fixed income market After thorough analysis he concludes the value of a AAArated corporate bond placed by investors based on their complete understanding of the bond’s interest rate, principal value and timing of its interest and principal payments is 90 The bond is currently selling at a price of 120 Based on the results collected, the analysis can most likely conclude that: A market prices accurately reflect intrinsic values B opportunities for profitable active investments exist C investors will take long positions in AAA-rated corporate bonds 81 Samson Electrics, a Dutch component manufacturer, has issued 3.2% noncallable, non-convertible, perpetual preferred shares with a par value of €1,000 The credit rating provided by Standard & Poor’s is AA- and the required return on identically rated preferred shares is 5.8% The intrinsic value of the preferred share is closest to: A €551.72 B €1,000.00 C €1,812.50 FinQuiz.com © 2015 - All rights reserved 31 CFA Level I Mock Exam – Questions (PM) 82 Smith Richards is an equity analyst following the stock of Horizon Limited, a company in the telecommunications sector The company’s balance sheet for the year 2013 is presented below Richards aims to ascertain whether Horizon’s stock is fairly valued The company has 5,000 shares outstanding, which are trading in the market at a price of $20.50 Exhibit: Summarized Balance Sheet for Horizon Limited for the Financial Year 2013* Cash $3,500 Accounts Receivable 25,000 Inventories 4,300 Net fixed assets 45,000 Total assets 77,800 Accounts Payable Notes Payable Common shareholder’s equity Total liabilities and equity 10,100 2,500 65,200 77,800 *With the exclusion of net fixed assets, the market value of all assets and liabilities are equal to their book values The market value of net fixed assets is 1.5 times its book value Based on Horizon Limited’s book value per share, Richards will most likely conclude that its stock is: A overvalued B fairly valued C undervalued 83 Identifying the target market during the index construction process involves determining the: A investment universe B broadest definition of a market segment C allocation to specific securities included in the index FinQuiz.com © 2015 - All rights reserved 32 CFA Level I Mock Exam – Questions (PM) 84 The exhibit below illustrates the details concerning a price-weighted equity index Security A B C D Total Beginning of period price 15.5 25.0 128.5 200.0 Weight Shares Dividends End of (%) outstanding per share period price 20 1,000 0.25 13.0 20 1,000 1.00 22.0 20 1,000 0.75 145.0 40 2,000 0.25 230.5 5,000 The price return of the index is closest to: A 3.04% B 4.33% C 12.65% 85 The total return of a price-weighted index has changed relative to an equalweighted index, identical in all other respects Which of the following least accurately justifies the reason for the difference in values? A Outperformance of large-cap stocks B Outperformance of small-cap stocks C A constituent stock has undergone a stock split 86 Brian Ross is a wealthy entrepreneur managing his own investment portfolio He is seeking to expand his investment portfolio, which comprises solely of equities Ross is seeking a tax-efficient investment, which has a moderate to high degree of liquidity and can bring diversification benefits to his portfolio He is exploring direct real estate as a potential investment vehicle Which of the following factors will discourage Ross from investing in direct real estate? A Illiquidity B Tax consequences C Low diversification potential FinQuiz.com © 2015 - All rights reserved 33 CFA Level I Mock Exam – Questions (PM) 87 The exhibit illustrates a market’s standing limit order book at market close Exhibit Market’s Standing Limit Order Book Bid Sizes Limit Prices Ask Sizes 70 15 69 13 68 11 67 10 65 64 63 62 What is the market? A 65 bid and 67 ask B 65 bid and 70 ask C 62 bid and 67 ask 88 The exhibit below illustrates the limit orders outstanding on a market’s book following the arrival of a large order Buyer Jones Victor Stevens Exhibit: Market Limit Order Book Bid Limit Offer Seller Size Price (€) Size 49.9 50.0 50.1 Allen 50.2 Cunningham 50.3 12 Whittaker Kim Toyama submits a day order to buy 18 contracts, limit €50.2 Toyama’s average trade price is closest to: A €49.96 B €50.15 C €50.18 FinQuiz.com © 2015 - All rights reserved 34 CFA Level I Mock Exam – Questions (PM) Questions 89 to 94 relate to Derivatives 89 In contrast to interest rate options, forward rate agreements (FRAs): A impose obligations on the counterparties B are contracts with interest rate as the underlying C are usually offered for purchase and sale by different dealers 90 Leslie Hower is a junior trader at a derivatives dealer firm During her first week following appointment, Hower attempts to synthetically sell a risk-free bond using call and put options She purchases call and put options with the same exercise price and time to maturity She simultaneously sells the underlying short With respect to her attempts in creating a synthetic short position in a risk-free bond, however is most accurate regarding her decision to: A purchase call options B purchase put options C sell the underlying short 91 A dealer has established a protective put position by buying a stock worth $85 A put option on the stock with an exercise price of $94 is selling for $11 For the dealer to breakeven, the stock price has to move: A up at $96 B up at $105 C down at $83 92 An investor has invested in a bond selling for $22.50 He has sold a call option for $7.66 that has an exercise price of $31.55 The investor expects the bond price to be $45.00 at expiration The maximum profit of the position is closest to: A $14.84 B $21.11 C $30.16 FinQuiz.com © 2015 - All rights reserved 35 CFA Level I Mock Exam – Questions (PM) 93 The value of European call option is inversely related to the: A exercise price B time to expiration C value of the underlying 94 A synthetic long position in a risk less bond is created by combining: A a long position in a put + long position in the underlying + short position in the call B a long position in a call + long position in the underlying + short position in the put C a short position in a put + short position in the underlying + long position in the call FinQuiz.com © 2015 - All rights reserved 36 CFA Level I Mock Exam – Questions (PM) Questions 95 to 106 relate to Fixed Income 95 The current market price of a three-year floating rate note (FRN) paying the sixmonth LIBOR plus 0.25% on a semi-annual basis is 98.70 per 100 of par value The current six-month LIBOR is 1.05% and is expected to remain constant Given that the interest payment each period is 0.650 per 100 of par value, the discount margin is closest to: A 2.57% B 4.78% C 7.64% 96 Which of the following type of fixed income security has the lowest degree of interest rate risk? A Fixed-rate bond B Floating-rate bond C Inflation-indexed bond 97 A 180-day money market instrument is quoted at an add-on rate of 4.76% for a 360-day year The bond equivalent yield of the instrument is closest to: A 4.76% B 4.83% C 4.94% 98 An investor purchases a five-year, 6% annual-coupon payment bond at 89.4535 and sells it in four years Following the purchase of the bond and prior to the receipt of the first coupon, interest rates go down to 8.5% The realized yield on the bond investment is closest to: A 3.77% B 5.79% C 8.71% FinQuiz.com © 2015 - All rights reserved 37 CFA Level I Mock Exam – Questions (PM) 99 An 8.0% semi-annual coupon payment bond has an eight year maturity and is priced to yield 9.5% The money duration and modified duration of the issue is 7.3524 and 5.3515, respectively The full price of the issue is 106.35 Ignoring the effects of convexity, the revised full price of the issue if yields increase by 125 basis points is closest to: A $96.58 B $99.24 C $116.12 100 Which of the following issues has the highest seniority ranking in the event of default? A Subordinated B Senior unsecured C Senior subordinated 101 ABC Inc has invested in a 5-year convertible bond issue trading at a price of $1,050 The issue is convertible into the issuer’s common shares at an exercise price of $40 The exhibit demonstrates the price of the issuer’s stock over a five day term Exhibit Issuer Stock’s Price per Share Day Price ($) 36 32 42 40 34 Conversion parity will occur on Day: A B C FinQuiz.com © 2015 - All rights reserved 38 CFA Level I Mock Exam – Questions (PM) 102 Which of the following characteristics are unique to partially amortized bonds? A Balloon payment at maturity B Entire payment of principal occurs at maturity C Periodic payments of interest and principal repayments based on a schedule 103 Which of the following coupon payment structures will allow investors to benefit from an increase in interest rates? A Plain vanilla bonds B Floating rate notes (FRNs) C Inverse FRNs 104 A company has issued a 15-year bond with a notional principal of $350 million The sinking fund provision calls for 8% of the outstanding principal amount to be retired in years 8-14 with the outstanding balance paid off at maturity in 15 years The outstanding principal balance at the end of Year is closest to: A $294.00 B $296.24 C $322.00 105 Which of the following issues is most likely classified as a domestic bond? A A French company issues Euro-denominated bonds in Germany B A U.S company issues U.S dollar denominated bonds in Canada C A Swedish company incorporated in Japan issues Yen denominated bonds in Japan 106 A four-year 6% semiannual coupon payment corporate bond is priced at 110 per 100 of par value Its yield to maturity is 7.87%, quoted on a semiannual basis The annual rate of the bond that can be used for direct comparison with otherwise comparable bonds that make quarterly coupon payments is closest to: A 7.79% B 8.02% C 15.74% FinQuiz.com © 2015 - All rights reserved 39 CFA Level I Mock Exam – Questions (PM) Questions 107 to 112 relate to Alternative Investments 107 At the beginning of the year 2012, Gus Knight invested $100,000 in a hedge fund with a “1 and 10” fee structure The value of the fund at the end of the year rises to $135,000 and by 5% at the end of 2013 Management and incentive fees are paid at the end of the year and are calculated independently In the year a fund’s net value declines, incentive fees are not be paid The hedge fund’s high water mark at the end of 2013 is closest to: A $135,000.0 B $135,150.0 C $136.657.5 108 A drawback of investing in funds of hedge funds most likely includes: A diluted returns B longer lockup periods C difficulty in conducting due diligence 109 A key risk cited for investing in alternative investments includes: A limited redemption availability B concentrated portfolio positions C reduced diversification potential 110 Which of the following real estate indices will most likely result in a sample selection bias? A REIT index B Appraisal index C Repeat sales index FinQuiz.com © 2015 - All rights reserved 40 CFA Level I Mock Exam – Questions (PM) 111 An analyst is calculating the one year price of a commodity futures contract with the following characteristics: Spot price Convenience yield Storage costs Risk free rate (Rf ) = 5% $80.96 $5.50 $7.80 The price of a one year commodity future contract is closest to: A $82.71 B $83.26 C $87.31 112 Which of the following is most likely the motivation for a passive investor buying commodities for his portfolio? A Speculation B Risk taking opportunity C Risk diversification benefits FinQuiz.com © 2015 - All rights reserved 41 CFA Level I Mock Exam – Questions (PM) Questions 113 to 120 relate to Portfolio Management 113 Which of the following is the major drawback of the top down investment approach? A This approach involves high active risk B This approach involves high trading cost C Major portion of the portfolio is invested passively 114 Which section of the investment policy statement provides description regarding the custodian of the client’s assets? A Introduction B Investment guidelines C Statement of duties and responsibilities 115 Which of the following characteristic best describes an ETF? A Low initial investment B No uncertainty in price C No cash flows during the investment period FinQuiz.com © 2015 - All rights reserved 42 CFA Level I Mock Exam – Questions (PM) 116 Recourse Associates is an investment management firm located in the U.S Bailey Gibbons is a portfolio manager serving the firm Gibbons is managing the Global Developing Market Equity Fund (GDMEF) at Recourse The assets under management and the net returns generated by the fund over the previous three years are summarized in an exhibit The applicable tax rate is 30% and inflation is expected to remain stable at a rate of 1.5% Net returns are prior to considering the effects of taxes and inflation Exhibit: Information Concerning the GDMEF (Years 1-3) Assets Under Management at the Year Beginning of the Year ($) Net Return (%) 10 million 15 million 18 million The real after-tax return of the fund in Year is closest to: A 1.97% B 2.41% C 3.50% 117 Mark Taylor is an equity investor who has recently purchased the stock of a Kenyan enterprise The risk-free rate of return in Kenya is 4.5% while the expected return on the market index is 7.2% The correlation of the stocks purchased with the market index has recently increased from 0.6 to 0.8 and the standard deviation of the stock and market index is 25.7% and 16.4% respectively The expected return on the Kenyan stock is closest to: A 5.88% B 7.88% C 13.53% FinQuiz.com © 2015 - All rights reserved 43 CFA Level I Mock Exam – Questions (PM) 118 Maya Thomas is an independent equity investor who has undertaken an investment in a Brazilian coffee manufacturer’s stock The covariance of the manufacturer’s stock with the market index and market variance is 0.01577 and 0.01360 respectively Thomas can most likely anticipate earning a return on her equity investment that is: A less than the risk-free rate B less than the market return C greater than the market return 119 With different borrowing and lending rates, the slope of the CML will become: A curved to the left of the market portfolio B kinked to the right of the market portfolio C less steep to the right and left of the market portfolio 120 Writing an investment policy statement (IPS) is important because it: A is recommended by codes of corporate governance B can be used as a basis to determine the suitability of an investment C allows identification of any conflict between a client’s objectives and constraints FinQuiz.com © 2015 - All rights reserved 44 .. .CFA Level I Mock Exam – Questions (PM) FinQuiz.com – 2nd Mock Exam 20 15 (PM Session) Questions Topic Minutes 1-18 Ethical and Professional Standards 27 19- 32 Quantitative Methods 21 33-44... return data for the years 20 00 to 20 04 Exhibit: Stock and Bond Return Data 20 00 -20 05 Stocks (%) Bonds (%) 20 00 7.4 10.1 20 01 - 5.6 3.4 20 02 3.7 - 1.1 20 03 9.3 7.9 20 04 14.7 12. 8 The time series mean... depreciation method $680,000 $20 0,000 years 1,000 chips 20 10: 28 0 20 11: 450 20 12: 120 20 13: 100 20 14: 50 Units-of-production The accumulated depreciation expense in 20 11 is closest to: A $65.6