Cfa Level 1 Mock Exam 1 Morning Paper 341u4l
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CFA Level 1 – Mock Exam 1 Morning Paper 2014
Instructions
1. DO NOT turn over this page unless instructed. 2. The exam is of 3 hours duration. No candidate is allowed to leave the exam hall in the first 30 minutes or in the final 30 minutes. If you wish to leave the exam hall within the permitted times you must obtain the permission of the Proctor. 3. You will be given time warnings when there are 30 minutes and 10 minutes remaining. 4. You are to write your answers onto the separate answer sheet. 5. You may use the question paper for workings but are not permitted to make any marks on the answer sheet other than to completely fill in the oval corresponding to your response to each question. 6. You may use only a Texas Instruments BAII or Hewlett Packard 12C calculator. 7. You may not eat or drink in the exam hall. 8. Mobile phones must be switched off (, in the real exam mobiles are not permitted). 9. You must stop writing immediately when instructed to do so at the end of the examination. 10. A separate answer book will be provided at the end of each exam. Once you have marked you exam please e-mail your score to [email protected]. 12. Your score does not matter; it’s what you find out along the way that counts.
The following 18 questions relate to Ethical and Professional Standards
1.
The CFA Institute Professional Conduct Program is covered by
A. The CFA Institute Bylaws B. United States of America federal law C. The local laws of whichever country reside in
2.
Which circumstances can prompt an inquiry into member conduct?
A. Self disclosure of an oral complaint B. Self disclosure of a written complaint C. Oral complaints received from the general public
3.
What is the Designated Officer empowered to do?
A. Issue a cautionary letter B. Apply a binding sanction C. Suspend participation in the CFA program
4.
Which of the following is part of the Code of Ethics?
A. and Candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment. B. and Candidates must act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests. C. and Candidates must promote the integrity of and uphold the rules governing capital markets
5.
Gillian Green’s employer – AXN Investments, is acting as the lead manager for a bond issue by one of its clients, Kirin Industries. Gillian discovers a discrepancy between the first and second draft of Kirin’s most recent quarterly s; the discrepancy indicates that Kirin is trying to hide significant losses for the quarter. Which of the following is Gillian’s best of course of action?
A. Notify her supervisor in AXN Investments B. Disassociate herself with any further dealings with Korin C Notify an appropriate regulator
6.
Xander Moore is an equity analyst who is in the process of switching employers. He left RedRock Investment Managers on 28 February and will take up his new position with DDhS Advisors on 1 May. He is approached by the CEO of APS Camps, a rapidly growing company offering sporting activities to the young, who asks Xander to write a report on APS Camps. He would be paid a flat fee plus a percentage of any funds received from share purchases following his report. What is Xander’s best course of action?
A. To accept the commission from APS Camps B. To not accept the commission from APS Camps C. Obtain approval from his new employer prior to accepting the commission from APS Camps
7.
At the end of last year Inge Woudstra set up a new Hedge Fund, called FundInge, using the redundancy settlement she received from her previous employer as 50% of the funds invested, the remainder being invested by friends and family . Using complex computer–based algorithms the fund generated returns of 12% above the benchmark return of 5% and achieved a high Sharp Ratio Inge wants to increase funds under management by offering the fund to new investors. She back tests the algorithms for a three year period and finds that the fund would have achieved similar levels of outperformance, in of return and Sharp ratios. She goes on to calculate the Total Expense Ratio and Maximum Drawdown. Inge draws up marketing material showing a four year performance history. Has there been a breach of the Code and Standards?
A. No B. Yes; Inge should have shown five rather than four years performance history C. Yes; if Inge failed to disclose that three of the four years were based on simulated rather than actual performance.
8.
Gabi Miklichansky is the Research Director at GMM Capital Advisors, a consultancy which offers research on fixed income strategies and particularly sovereign bonds. Gabi asks her product structuring team to devise a strategy that will benefit from rising interest rates. She is impressed by the complex product they produce which uses a combination of putable bonds, buying bonds with warrants attached and selling the warrants and selling T-bill futures. Gabi markets the fund and illustrates the returns that would be expected under a series of different higher-yield scenarios. She clearly states that this is modelled – as opposed to actual – data. She does not describe the process in detail citing its complexity and proprietorial nature. She also states that – in her opinion – there is no downside risk as the path of interest rates is set to increase. Has there been a breach of the code and standards?
A. No; she has clearly indicated this is model data B. No; she has clearly stated that it is her opinion that interest rates will rise. Clients of the opinion rates will fall or stay on hold can avoid the product. C. Yes; her report fails to adequately describe the characteristics of the actual and implied risks of the investment product.
9.
Why were the GIPS created?
A. To standardise ing standards globally B. To penalize insufficient disclosure of information C. To allow investors to make meaningful comparisons between firms
10.
To claim compliance with GIPS a firm must?
A. State that it is compliant B. Ask their compliance officer to confirm compliance C. Hire an independent third party to compliance
11.
Jonny Uden is the Chief Investment Officer of Melrose Asset Management, a large whole-market equity fund. The firm has recently lost a number of key personnel who specialized in the small- and medium-cap sectors of the market. Given volatile market conditions, Jonny decides that his best course of action is to sell off the small-cap and medium-cap holdings and concentrate in large-cap stocks. Jonny identifies suitable fund managers for these small- and mid-sized stocks and allocates the appropriate share of the total funds. He then instructs his firms’ marketing department to notify all clients of the reason for the change, that there will be a net reduction in portfolio costs and the basis for selecting the fund managers. He then instructs senior portfolio managers to clients directly, ing first those clients with the highest assets under management
A No. B. Yes; if Melrose is established as an equity fund it is not permitted under the code and standards to use secondary managers. C. Yes; Jonny failed to obtain client approval prior to the change in mandate and because he is not ensuring that clients are being communicated with fairly.
12.
Which of the following can claim compliance with GIPS?
I
Asset managers
II
Investment Consultants
III
Performance Measurement Software Providers
A. I only B. I and II only C. I and III only
13. Lotte Sondstroem has recently been appointed as the Chief Investment Officer of JSM Investments. The firm has promoted itself as aiming to outperform its benchmark by running aggressive, actively-traded funds with a very high portfolio turnover rate to capture market mis-pricings. A combination of poor decisions and high transaction costs has left JSM in the bottom quartile of performance for each of the last four years. Lotte instructs that the firm reduces its portfolio turnover rate significantly and adopt a Core-Satellite approach .This involves holding a portfolio which largely replicated the index and then taking active bets on a few instances where they are confident of a mispricing. Lotte reasons the reduced transaction costs will increase net-of-fees returns to investors. Lotte updates the marketing material for new clients and will fully disclose the change to existing clients when they receive their annual statement. Is there a breach of the Code and Standards? A. Yes; Lotte has failed to notify her clients of the change in investment methodology in advance B. Yes; Lotte has failed to notify her clients of the change in investment methodology in a timely manner C. No; Lotte is acting in her clients’ best interests and in line with the semi-strong form of the Efficient Market Hypothesis
14.
Which of the following statements is true?
A. Portfolios should be added to composites as soon as the portfolio’s investment return characteristics are known. B. Portfolios should be added to composites as soon as the client’s investment objectives are known. C. Portfolios should be removed from composites as soon as the portfolio is terminated.
15 Dan Maddocks is Head of Trading at CherryWood investments. On 8 November CherryWood send out a research note on Pluriel Inc, changing their recommendation from Neutral to Outperform. On 9 November they receive an order from a full-service client (who was sent the report) to sell Pluriel. Dan should A. Process the order as it is an execution only instruction from a client B. Refuse to process the order as it contrary to the firm’s own recommendation. C. Process the order having explained the recent change in recommendation.
16.
Mary Nicol is the Head of Research at Four Square Capital (FSC). She is approached by the Head of Investment Banking at FSC and asked to change an investment recommendation on NWK, a firm on which FSC provides research coverage, from Sell to Buy. The Sell recommendation is inconsistent with FSC acting as a t book-runner on a rights issue being offered by NWK. Mary’s best course of action would be to:
A. Appoint a new analyst to check whether the initial recommendation for NWK was correct or needed to be updated B. Discontinue offering coverage on NWK but responding to requests for factual information from clients to whom the research had already been given. C. Change the investment recommendation in line with FSC Investment Banking recommendation.
17. Pam Ring has been appointed a supervisor in her firm. Many, but not all, of those she supervises are subject to the CFA ® Code and Standards. Which of the following statements is true? A. She can only delegate responsibilities to those subordinates who are covered by the Code and Standards B. She is able to delegate responsibilities to all of her subordinates and is required to monitor all subordinates. C. She is able to delegate responsibilities to all of her subordinates but would only be required to monitor those subordinates who are not covered by the Code and Standards
18.
Toby Logan has been appointed to manage the Occupational Pension Scheme of Ealing Media. His duty of loyalty, prudence and car is due to:
A. The shareowners of Ealing Media B. The trustees of the Ealing Media Occupational Pension Scheme C. The and beneficiaries of the Ealing Media Occupational Pension Scheme
The following 14 questions relate to Quantitative Methods
19.
Which of the following correctly calculates the Sharp ratio of risk-adjusted returns?
A. Residual Return divided by Residual Risk B. Return in excess of the risk-free rate all divided by the risk of the market C. Return in excess of the risk-free rate all divided by the risk of the portfolio.
20.
The sum of deviations from the mean is zero for the
A. Sample and population means B. Geometric and harmonic means C. Weighted average mean and mode
21.
A ‘fat-tailed distribution’ could also be described as which of the following?
A. Leptokurtic B. Platykurtic C. Mesokurtic
22.
Regarding Technical Analysis which of the following statements is true?
A. When a short-term moving average crosses from underneath a longer-term moving average the movement is considered bearish and is known as a dead cross B. When a short-term moving average crosses from above a longer-term moving average the movement is considered bullish and is known as a golden cross C. A longer-term investor using Bollinger bands as part of their strategy would be likely to buy securities that had broken through the lower Bollinger band
23.
Which of the following portfolios maximizes Roy’s Safety First criterion, if your threshold return is today’s inflation rate of 3%?
A. Expected Return 12%, Variance 9% B. Expected Return 16%, Variance 16% C. Expected Return 8%, Variance 4%
24.
Given a stated monthly rate of 0.33333%, what is the effective rate with continuous compounding?
A. 1.04081% B. 4.08108% C. 5.45979%
25.
What is the main advantage of Monte Carlo over historical simulation?
A. It uses actual data B. It does not need detailed estimates of parameters C. It can explore hypothetical “what if” scenarios
26.
The Student’s t-distribution is best described as being
A. Symmetrical, thinner tailed than a normal distribution, n-2 degrees of freedom B. Asymmetrical, fatter tailed than a normal distribution, n-1 degrees of freedom C. Symmetrical, fatter tailed than a normal distribution, n-1 degrees of freedom
27.
A type one error involves:
A. Accepting a false null hypothesis and is less likely with a higher level of significance B. Rejecting a true null hypothesis and is less likely with a higher level of significance C. Rejecting a true null hypothesis and is less likely with a lower level of significance
28.
When the population variance is known and normally distributed, which test for its mean is most appropriate?
A. Z test B. T test C. Chi squared test
29.
A B C 30.
To test whether two populations have the same variance, which test is used, and what shape is its distribution? Test
Shape of Distribution
F Test F Test Chi Squared
Symmetrical Asymmetrical Asymmetrical
What is the minimum value for the Chi Squared statistics and F statistics?
A. 0 B. 3 C. Infinitely negative
31.
Gala Nasr is saving for retirement. She is currently 40 years old and intends to retire fully at 65 having cut down on her work once she reaches 60. She intends saving $20,000 at the end of each year until she is 60 (20 payments). When she reaches 60 her salary will be reduced to cover her living expenses but not provide for further saving however her pension fund will grow throughout at 7%. The amount available on her 65th birthday to purchase a pension will be closest to:
A
$819,909.84
B
$1,149,965.97
C
$1,264,980.75
32.
Smarts Msimang is planning for his retirement. Smarts is celebrating his 25th birthday by doing some retirement planning. He considers that he will be able to afford savings of $1,500 at the end of each of the next 15 years and is willing to take risks in order to earn a return of 11% over this time. He considers that when he is in his 40s he will be able to save more but take less risk. He wishes to retire at 65 and with a pension fund of $750,000. Assuming he can earn an 8% return in this second saving phase what should Smarts be aiming to save in this second 25-year period?
A
$5,424.51
B
$5,858.47
C
$15,093.66
The following 12 questions relate to Economics 33.
Which of the following would appear to be correctly specified as a supply function?
A
Q = -7 + 25Price – 14 Input costs
B
Q = -7 + 25Price + 14 Input costs
C
Q = -7 - 25Price – 14 Input costs
34.
Calculate the four firm concentration ratio and the Herfindahl-Hirschman concentration index for the following industry. Mobile Networks Orange T Mobile O2 Vodafone
Market Shares (%) 15 20 25 30
A.
75, 0.2150
B.
90, 0.2150
C.
90, 0.2850
35.
Which of the following statements is true?
A
For inferior goods, the income and substitution effects are reinforcing
B
For Giffen goods, the income effect can offset the substitution effect
C
For Giffen goods, the income effect does offset the substitution effect
36.
Which of the following are best described as renewable natural resources?
A.
Norwegian water reserves
B.
Liquid, transportable, natural gas from Qatar
C.
Industrial coking-grade coal used for steel making
37.
You are required to compute a Laspeyre index to base 100 for the following twoproduct basket
Pizza Pasta
Price (Base year) 5 1
Quantity consumed (Base year) 20 50
Price (Current) 7.5 1.25
Quantity consumed (Current) 15 60
A
125
B
138.89
C
141.67
38.
How many and which of the following biases are most likely to lead reported I figures to overstate inflation? I Quality change bias II New goods bias III Commodity substitution bias
A.
I only
B.
I and III only
C.
I, II and III
39.
Why might real GDP differ from potential GDP in the macroeconomic short run?
A.
All money prices are sticky
B.
Some money prices are sticky
C.
Some real prices are sticky
40.
To tighten monetary policy, the Federal Reserve is most likely to
A.
Increase the discount rate
B.
Use open market operations to sell Treasury Bills
C.
Increase required reserve ratios
41.
A government expenditure stimulus, delivered as part of a balanced budget multiplier will most likely
A.
Be counterproductive, due to the crowding out effect
B
Be expansionary, provided household Marginal Propensity to Consume is >1
C
Be successful provided household Marginal Propensity to Consume is <1
42.
If money supply increases by 10% and the velocity of money reduces by 5%, given that output is in the short term fixed, the most likely change in the price level is?
A. 0% B. +5% C. -5%
43 You are required to compute a 6 month forward rate for USD/GBP given a spot rate of USD/GBP 1.5275 a 4% UK interest rate and a 2% US interest rate The 6 month forward rate would be closest to: A USD/GBP 1.5426 B USD/GBP 1.4981 C USD/GBP 1.5125
44 According to the Riccardian model of international trade, countries should specialise in the production of items in which the country has A An absolute advantage B A comparative advantage C A relatively greater abundance of the factor of production required to make that item
The following 34 questions relate to Financial Reporting Analysis and Corporate Finance 45.
At the end of an ing period a law firm reports chargeable hours worked as revenue in the Income Statement, before the client has been billed for the work. Which of the following statements is true?
A. The unbilled revenue would also be shown on the balance sheet as an asset B. The unbilled revenue would also be shown on the balance sheet as a liability C. This would be an example of aggressive ing and low financial reporting quality
46.
Which of the following is not a common approach to the creation and maintenance of Financial Reporting Standards?
A. A rules-based approach B. A principles-based approach C. An asset/liability approach
47.
Matt Leedham is an analyst who covers the aviation sector. Most airlines which he follows use lease finance to acquire their fleet of aircraft with around 50% of firms reporting their leases as Operating Leases and the rest as Capital (Finance) leases. Which of the three classifications of cash flow could be compared directly, without having to make any adjustment for the type of lease classification?
A. Investing Cash Flows B. Operating Cash Flows C. Financing Cash Flows
48.
Where would you be most likely to find disclosures of a company's significant ing policies?
A. Footnotes B. FASB website C. Management Discussion and Analysis
49.
In 2008 ROS Properties bought land for $6,000,000. They have successfully applied to have its permitted use changed to residential and sold it in 2014 to Becca Developers for $15,000,000. Becca will pay $3,000,000 as a down-payment with the balance payable in two years time when they hope to have sold on the completed development. What profit is ROS Properties able to report in 2014 under the installment method?
A. Nil B. $1,800,000 C. $9,000,000
50.
Throughout its financial year 2014 Fountain Engineering had 100,000,000 shares outstanding. They also had issued to employees 200,000 stock options with an exercise price of $25. The average market price over the year was $40. When computing diluted earnings per share the number of shares to be used in the denominator is closest to?
A. 100,000,000 B. 100.075,000 C. 100,120,000
51. Which of the following would most likely reduce a recorded pension fund liability? An increase in A Inflation B Life expectancy C Interest rates
52.
Which of the following statements is true?
A. Cross sectional analysis uses a vertical common size statement and time series analysis uses a horizontal common size statement. B. Cross sectional analysis uses a horizontal common size statement and time series analysis uses a vertical common size statement. C. Cross sectional analysis uses a vertical common size statement and time series analysis uses a vertical common size statement.
53.
The lowest debt ratio (by numeric value) for most companies is likely to be
A. Debt to equity B. Debt to total assets C. Debt to net assets
54.
Credit rating analysts are most likely to look at which of the following ratios?
A. Price to earnings B. Price to Cashflow ratios C. EBITDA interest coverage
55.
Which of the following is the most conservative measure of liquidity?
A. Cash Ratio B. Quick Ratio C. Current Ratio
56.
Acre Agriculture reported a salary expense of £3,000,000 for the year, opening salaries payable of £200,000 and ending salaries payable of £120,000. Cash paid to employees is closest to:
A. £2,920,000 B. £3,080,000 C. £3,200,000
57
Dagmar Inc. recently reported deferred tax assets of $325,000 and deferred tax liabilities of $430,000. These values are similar to those reported in previous years. Dagmar anticipates a reduction in the rates of tax payable. This would result in:
A. A strengthening of the balance sheet but an increased tax expense B. A strengthening of the Balance Sheet and a reduced tax expense C. A weakening of the Balance Sheet and a reduced tax expense
58.
What will be the most likely relationship between pre-tax operating cash flow and the reported tax expense for a firm reporting using LIFO, compared to a firm which uses FIFO but is in all other respects identical? A B C
59.
Pre-tax Operating Cash Flow Same Same Higher
Tax Expense Lower Higher Same
In pension ing which of the following is likely to have the smallest impact on the reported pension expense?
A Interest expense B Service cost C Actuarial gains/losses
60.
Impairment losses are most likely to impact which of the following primary financial statements?
A. Income statement and Statement of Cash Flows B. Income Statement and Balance Sheet C. Statement of Cash flows and Balance sheet
61.
Crescent Circuits is engaged in a business where it receives cash from customers which is taxable on receipt but not recognized in the Income Statement until the customer receives delivery of the completed product. This is most likely to result in:
A. A deferred tax asset and a current asset of deferred revenue B. A deferred tax liability and a current asset of deferred revenue C. A deferred tax asset and a current liability of deferred revenue
62.
Two years ago, Glendale Golf issued a 10-year bond paying a fixed 7% coupon and callable at par on the coupon payment dates 1, 3 and 5 years prior to maturity. The bond was issued at par but yields have steadily fallen.
An analyst using the amounts recorded on the firms Balance Sheet is most likely to: A. Have a proper understanding of the firms liabilities B. Be over-estimating the value of the firms liabilities C. Be under-estimating the value of the firms liabilities
63.
Which of the following would most likely be classified as an Investment Property?
A. A construction firms completed properties being held for resale B. A major multi-national buying the freehold of an iconic city centre building for prestige and long-term capital appreciation C. A warehouse purchased under a finance lease and being rented out to a number of small tenants.
64.
ELM operate a defined benefit pension scheme which has plan assets with a fair market value of $20m and pension benefit obligations with a present value of $22m. How would the pension scheme be reflected on ELM’s Balance Sheet?
A. The Balance Sheet would report the plan assets and plan liabilities as a single line item (liability $2m). B. The Balance Sheet would report two separate line items, one for the plan assets and the other for the plan liabilities C. The Balance Sheet would report only the $22m liability as ELM does not have the right to use the pension schemes plan assets
65.
Under US GAAP bonds issued with warrants are ed for
A. As two separate securities B. In the same way as a convertible bond is treated under US GAAP C. In the same way as straight corporate debt
66.
You have gathered the following data from the footnote disclosures of Willoughby Industries. Inventory LIFO Reserve Tax Rate Cost of Goods Sold Operating Income Net Income
2014 $130,000 $38,000 20% $1,365,000 $226,000 $53,000
2013 $120,000 $35,000 20% $1,235,000 $232,000 $51,000
What figure should be reported as the FIFO-equivalent inventory value for 2014? A. $155,000 B. $133,000 C. $168,000
67.
Which of the following would be considered a form of off-balance sheet financing?
A. The use of operating leases B. The with-recourse sale of s receivable C. The issue of zero-coupon bonds
68.
Tom Logan, an analyst, gathered the following information about a firm (£Millions)
Cost of Fixed Asset Investments Accumulated Depreciation Expense
2013 5.6 2.4
2014 5.6 3.2
At the end of 2014 the best estimate of the firm’s average age and depreciable life of its assets is:
A. B. C.
Average Age 1.75 years 3.33 years 4 years
Depreciable Life 7 Years 6 years 7 years
69.
Which problems may arise from the IRR investment criterion for projects with positive cash flows, after negative cashflows, after positive cashflows?
I No IRR solution II Multiple IRR solutions A. I B. II C. Both I and II
70.
Clifton Inc currently operates with a WACC of 12.2%. equity comprises 60% of the Capital Employed with the remainder coming from debt at an after tax cost of 8%. They are considering issuing $50m in new equity to finance a major expansion. They are of the opinion that investors would require a return of 12% on the newly issued equity when they learn of the low-risk and cash-generative nature of the new project. The advisors to the issue will charge a fee of 3%. Assuming the new equity can be issued with a 12% required return, which of the following is true? A. There will be no relevant cash flow to consider but a reduction to the firms WACC B. There will be a relevant cash flow to consider but no adjustment required to the firms WACC C. There will be a relevant cash flow to consider and a reduction to the firms WACC
71.
Which of the following is best described as a primary source of liquidity?
A. Trade credit B. Asset liquidations C. Bankruptcy protection
72.
For large, followed and highly rated businesses which is most likely cheapest source of short term funding?
A. Commercial paper B. Discounted receivables C. Non-bank finance companies
73.
When it comes to hiring third party consultants, best practice suggests that directors:
A. Should be able to subject to management approval B. Should be able to subject to executive directors approval C. Should be able to without approval from any management executives
74.
Related party transactions must be disclosed in
A. Proxy reports B. Annual reports C. All communications with shareowners
75.
Which of the below correctly completes this sentence?
From a shareholder perspective, golden parachutes, greenmail and poison pills are____ A. Useful defences against hostile bids B. Designed to maximise shareholder value C. Potentially damaging to shareholder interests
76.
Gezo Inc raises capital in both the equity and fixed income markets. Using the data in the table below the appropriate weights to use when computing the firms WACC would be:
Number in issue Nominal value Issue price Market price
Shares
Bonds
2,000,000 $1 $10 $11
50,000 $1000 $1010 $990
A.
4% equity; 96% debt.
B.
28% equity; 72% debt
C.
31% equity; 69% debt
77.
Last year Fratelli BV had sales of €65m. Helen Archer, an analyst, forecasts sales growth will be 3%, EBITDA margin to be 35%, interest of €2.4m, depreciation to be €1.8m and taxes at 20% If Fratelli has 1m shares in issue and trades on a leading P/E multiple of 7x its shares should be worth?
A. €103.88 B. €107.70 C. €134.63
78.
Porters plc has a current ratio of 2.0 and a quick ratio of 1.5. Its current liabilities are £75m. Its inventory should be closest to:
A. £37.5m B. £62.5m C. £75m
The following 36 questions relate to Asset Valuation
79.
You buy 1000 Microsoft at $30 per share on 50% initial margin and 25% maintenance margin. What Microsoft share price would trigger a margin call? And what profit would you earn (ignoring margin interest and brokerage) if an investor who had purchased outright Microsoft shares at the same time made a 25% return?
A. $11.25; $22,500 B. $20; $22,500 C. $20; $7,500
80.
The Korean stock-market has very high trading volumes and very low trading costs commissions, taxes and spreads are all low. Yet sometimes stocks take a few days to reprice in response to significant news about global investors block trades. Which statement most accurately describes this market? I This market shows internal efficiency II This market shows external efficiency
A. I only B. II only C. Both I and II
81.
Which of the following statements is true?
A. Commodity indices are based on the weighted-average market price of a basket of commodities B. Replicating a commodity index is relatively easy provided the portfolio of commodities held at the start of the period reflects the weights used in the index calculation C. Commodity indices frequently have low correlations to the performance of the underlying commodities
82.
Which of the following would be a valid criticism of a free-float adjusted market capitalization equity index?
A. The shares available to trade can change over time leading to index volatility B. The free-float adjusted index will be difficult to replicate as the portfolio manager might not know the proportions of each constituent stock to hold C. The shares in the index that rise in value have an increasing weight in the index and may cause investors to become overweight in securities that are overvalued and underweight in securities that are undervalued
83.
You are considering making an investment in IOS stock; a firm where you would require a 9% return. IOS has just paid a dividend of $4 and you expect this dividend will grow at the foreseeable future at 5%.IOS’ Weighted Average cost of Capital is 8%. Using the dividend Discount model the price you should pay is closest to?
A. $100 B. $105 C. $140
84.
A carbon emissions trading exchange is expected to grow free cash flow to equity of $2 share by 25 percent a year for the next two years, and 15 percent a year for the following two, before being taken over in 4 years time by a larger exchange for $10 per share. The weighted average cost of capital is 8 percent and the required return on equity is 12 percent. What is the most accurate valuation?
A. $ 15.99 B. $ 16.26 C. $ 18.23
85
AWM is a software firm that develops specialist software used in ophthalmic medicine.to diagnose and record the progress of patients’ eye disease. The firm’s main customers are European state-owned health services. It was formed when three highly skilled developers broke away from a larger software group several years ago and has now grown to employer over 200people, including 32 industry-recognized experts. AWM regularly makes low profits. Management would prefer higher profits but on-going software development, required to stay ahead of the firms three main rivals, is expensive. According to Porter’s Five Forces model AWM operates in an industry with
A High supplier power, but low threat of new entrants B High buyer power and high supplier power C High buyer power and a high threat of new entrants
86
A market has the following limit orders. Buyer Ken Jim Mike
Bid Size 450 500 300
Limit Price 19.66 19.68 19.71 19.72 19.73 19.84 19.99
Offer Size
Seller
250 150 400 800
Rita Sue Bob Tzhu
Alexandra places a day order to sell 600, Limit 19.68. Assuming no other orders are placed for the stock that day the average price Alexandra will get is closest to? A £19.67 B £19.68 C £19.70
87.
Shares in ECM are currently trading on a forward P/E multiple of 5.2. The firm generates growth consistent with a Return on Equity of 12% and a Dividend Retention Rate of 30%. If investors require a return of 15% ECM’s justified P/E multiple using the DDM and your trading decision would be, assuming you are permitted to sell ECM stock short?
A B C
88.
Justified P/E 4.55 6.14 6.14
Trading Decision Sell Sell Buy
Price to book value is the most appropriate valuation measure for which of the following companies?
Advertising Agency Large Media/Entertainment Group (no longer going concern) Global Logistics firm A. Advertising agency B. Media/Entertainment Group C. Global Logistics
2013 Net Income (£m) 12.8
2014 Net Income 99.3
--23.2
Ceased trading;
14.2
14.4
89.
Calculate the most accurate figure that is closest to price to book value for the common stock of the following firm.
Shares at 1st January 2013 Tangible Shareholder's equity at 31 Dec 2013 Intangible Shareholders equity Preferred stock at 31 Dec 2013 Share buy backs during 2013 Rights issue during 2013 Share price at 31 Dec 2013
500,000 $60 million $75 million 15 million 200,000 100,000 $240
A. 0.8 B. 1 C. 2.133
90.
Given the following data is the most accurate estimate of earnings growth for the Japanese stock market? Dividend payout rate 40%
Net profit margin 2%
Asset turnover 6
Financial Leverage 3
A. 14.4% B. 21.6% C. 36% 91.
Given the following stated spot rates and forward rates you are required to compute the stated annual forward rate for the six-month starting in two years’ time Time period 6 month 12 month 18month 24 month 30 month 36 month
A 2.4% B 4.8% C 6.2%
Spot Rate 3.2% 3.4% 3.6% 3.8% 4.0% 4.2%
92.
A futures market is most likely to be in backwardation where
A Prices are reasonably stable B The convenience yield is high C The convenience yield is low.
93.
Which of the following would not be classified as an Alternative Investment?
A. Shares in an Exchange Traded Fund investing in Commodities B. Shares in a commodity consumer C. Physically holding a commodity such as gold, silver or other precious metals.
94.
A wealthy investor has a choice of investing $100,000 directly into each of 10 separate hedge funds or $1,000,000 into 1 fund-of-hedge-funds. Which of the following would most likely be an advantage of investing in the fund-of-funds compared to the individual funds?
A The fund-of-fund structure should give a diversification benefit improving the net-of-fees returns to the portfolio. B The fund-of-fund structure is likely to offer better redemption C The fund-of-fund structure is more suitable for individual investors; most hedge funds are only permitted to accept money from institutional clients only.
95.
Which of the following hedge fund features would not be considered an advantage to a hedge fund investor?
A A side pocket B A hurdle rate C A water mark
96.
If your opinion is bearish, neutral and bullish on Barclays Bank stock, which options, if any, would you be most likely to BUY in each case?
A. Puts, none, calls B. Calls, none, put C. Puts, puts and calls, calls
97.
The Northern Rock share price is 600p when an option changes hands. A 550p put option costs 50p to buy. What is the most accurate figure for the maximum profit if you buy the put and the maximum loss if you sell it? Assume it is held to expiry.
A. 500p, -500p B. 550p, -550p C. -600p, infinite
98.
Interest rates are so low in Japan that you borrow Yen 100,000,000 fixed at 1% for three years. You enter a fixed for fixed currency swap with Credit Suisse, swapping the Yen in return for SFR 1,000,000 at a fixed 2% interest payable yearly in advance. The Swiss franc appreciates ten percent against the Yen by the end of first year and thirty percent when the swap terminates at the end of the third year. What are the most likely payments you make to Credit Suisse at the end of years one and three?
A. SFR20 000 SFR 1 million B. SFR20,000, SFR1.3 million C. SFR10,000; SFR1 million
99.
Which most accurately describes a limited risk strategy for profiting from a view on interest rates?
A. Buy a cap for falling rates. Buy a floor for rising rates B. Buy a cap for rising rates. Buy a floor for falling rates C. Sell a cap for falling rates. Sell a floor for rising rates.
100
Which of the following would be an end of derivatives and which would be a dealer? X Citigroup wants to hedge its floating rate interest rate risk with a $US20 billion swap. Y Nigeria’s central bank seeks to make a 0.02 percent profit from the bid ask spread on a currency swap Z the World Bank needs to fix its Tanzanian Schilling exchange rate to fix the costs of building a bridge
A. X dealer, y and z end B. X and z end , y dealer C. X end , y and z dealer
101.
You purchase a 1X4 FRA at 3% on a notional principal of $1,000,000. At expiry the 90 day LIBOR rate is 6%. Which figure is closest to your profit or loss?
A. -$7,389 B. $7,444 C. $7,389
102.
Is the repo rate likely to be higher or lower than bank borrowing rates? Why is it most likely to differ from bank borrowing rates?
.A Lower, because its overnight B. Lower, because it’s collateralised C. Higher, because it’s not collateralised
103.
Moody’s says it wants to cut credit ratings on Greek Government bonds. This is best described as an example of which type of risk?
A. Default B. Downgrade C. Credit Spread
104.
If you are a US investor what is the main extra risk to you take on buying a Coca Cola bond paying coupons in Japanese Yen?
A. Japanese political risk B. Japanese sovereign risk C. Yen foreign currency risk
105.
Which of the following is best described as event risk?
A. An issuer is taken over B. An issuer calls back a bond C. Inflation rates accelerate rapidly
106.
An asset-backed security generally requires
A. Backing by hard tangible assets such as property B. A special purpose vehicle to hold the collateral remotely from the issuer C. Credit enhancements such as external guarantees or internal over-collateralization
107.
Tom Logan, a fixed income analyst, states: “All bonds have positive convexity apart from callable bonds in a rising yield environment” Julian Cooke, another analyst, states: “MacAulay duration should only be used to measure the interest rate risk of bonds with embedded options” Who is correct?
A
Tom but not Julian
B
Julian but not Tom
C
Neither Tom nor Julian.
108.
The price of a three year zero-coupon bond with a stated annual yield to maturity of 4.5% is closest to:
A. 87.50243 B. 87.62966 C. 93.12759
109.
Given the following term structure the price of a 2 year zero coupon bond is closest to:
Maturity 6 months 12 months 18 months 24 months 30 months 36 months
Stated Spot Rate (%) 4 5 6 7 8 9
A. 86.94432 B. 87.14422 C. 87.34387
110.
Using the term structure from question 109, the price of a two-year semi-annual10% coupon bond is closest to:
A. 101.38096 B. 105.95064 C. 105.73817
111.
Using the term structure from question 109 the 6 month forward rate starting in 24 months time is closest to:
A. 6.02% B.11.75% C.12.04%
112.
A callable bond is likely to have a z-spread which is
A. Less than its option adjusted spread B. More than its option adjusted spread C. Equal to the option adjusted spread but higher than its nominal spread
113.
Julian Cook, an analyst, states “When interest rates rise dramatically callable bonds will exhibit negative convexity”. He goes on to state “The higher the level of interest rates the higher the price volatility of a bond for any further interest rate changes” Julian is:
A. Correct with respect to negative convexity and correct with respect to price volatility B. Correct with respect to negative convexity but incorrect with respect to price volatility C. Incorrect with respect to negative convexity and incorrect with respect to price volatility
114.
Which bond will have the highest convexity?
A. A 5 year 3% coupon bond with a YTM of 8% B.A 10 year 3% coupon bond with a YTM of 5% C. A 10 year zero coupon bond with a YTM of 5%
The following 6 questions relate to Portfolio Management 115. The market portfolio contains: A. An Equal weighted combination of all risky assets B. A Market value weighted combination of all risky assets C. A Mean-Variance Optimized combination of all risky assets
116 A policy statement can help with A. Performance evaluation B. Performance measurement C. Performance verification checks
117. Older people are likely to have: A. Lower risk appetite and lower liquidity requirements compared with younger people B. Lower risk appetite and higher liquidity requirements compared with younger people C. Higher risk appetite and higher liquidity requirements compared with younger people
118. Capital appreciation is best described as a desire to grow investments A. Faster than the risk free rate B. Faster than the rate of inflation C. Faster than the S&P500 us equity index
119. What is the standard deviation of the following two asset portfolio? Asset Expected Return Standard deviation Weight Covariance
1 12% 16% 30%
2 15% 19% 70% 91.2
A. 8% B. 13% C. 15%
120. What percentage of funds returns over time can be explained by their target asset allocation policy? A. 50% B. 70% C. 90%
Instructions
1. DO NOT turn over this page unless instructed. 2. The exam is of 3 hours duration. No candidate is allowed to leave the exam hall in the first 30 minutes or in the final 30 minutes. If you wish to leave the exam hall within the permitted times you must obtain the permission of the Proctor. 3. You will be given time warnings when there are 30 minutes and 10 minutes remaining. 4. You are to write your answers onto the separate answer sheet. 5. You may use the question paper for workings but are not permitted to make any marks on the answer sheet other than to completely fill in the oval corresponding to your response to each question. 6. You may use only a Texas Instruments BAII or Hewlett Packard 12C calculator. 7. You may not eat or drink in the exam hall. 8. Mobile phones must be switched off (, in the real exam mobiles are not permitted). 9. You must stop writing immediately when instructed to do so at the end of the examination. 10. A separate answer book will be provided at the end of each exam. Once you have marked you exam please e-mail your score to [email protected]. 12. Your score does not matter; it’s what you find out along the way that counts.
The following 18 questions relate to Ethical and Professional Standards
1.
The CFA Institute Professional Conduct Program is covered by
A. The CFA Institute Bylaws B. United States of America federal law C. The local laws of whichever country reside in
2.
Which circumstances can prompt an inquiry into member conduct?
A. Self disclosure of an oral complaint B. Self disclosure of a written complaint C. Oral complaints received from the general public
3.
What is the Designated Officer empowered to do?
A. Issue a cautionary letter B. Apply a binding sanction C. Suspend participation in the CFA program
4.
Which of the following is part of the Code of Ethics?
A. and Candidates have a duty of loyalty to their clients and must act with reasonable care and exercise prudent judgment. B. and Candidates must act for the benefit of their clients and place their clients’ interests before their employer’s or their own interests. C. and Candidates must promote the integrity of and uphold the rules governing capital markets
5.
Gillian Green’s employer – AXN Investments, is acting as the lead manager for a bond issue by one of its clients, Kirin Industries. Gillian discovers a discrepancy between the first and second draft of Kirin’s most recent quarterly s; the discrepancy indicates that Kirin is trying to hide significant losses for the quarter. Which of the following is Gillian’s best of course of action?
A. Notify her supervisor in AXN Investments B. Disassociate herself with any further dealings with Korin C Notify an appropriate regulator
6.
Xander Moore is an equity analyst who is in the process of switching employers. He left RedRock Investment Managers on 28 February and will take up his new position with DDhS Advisors on 1 May. He is approached by the CEO of APS Camps, a rapidly growing company offering sporting activities to the young, who asks Xander to write a report on APS Camps. He would be paid a flat fee plus a percentage of any funds received from share purchases following his report. What is Xander’s best course of action?
A. To accept the commission from APS Camps B. To not accept the commission from APS Camps C. Obtain approval from his new employer prior to accepting the commission from APS Camps
7.
At the end of last year Inge Woudstra set up a new Hedge Fund, called FundInge, using the redundancy settlement she received from her previous employer as 50% of the funds invested, the remainder being invested by friends and family . Using complex computer–based algorithms the fund generated returns of 12% above the benchmark return of 5% and achieved a high Sharp Ratio Inge wants to increase funds under management by offering the fund to new investors. She back tests the algorithms for a three year period and finds that the fund would have achieved similar levels of outperformance, in of return and Sharp ratios. She goes on to calculate the Total Expense Ratio and Maximum Drawdown. Inge draws up marketing material showing a four year performance history. Has there been a breach of the Code and Standards?
A. No B. Yes; Inge should have shown five rather than four years performance history C. Yes; if Inge failed to disclose that three of the four years were based on simulated rather than actual performance.
8.
Gabi Miklichansky is the Research Director at GMM Capital Advisors, a consultancy which offers research on fixed income strategies and particularly sovereign bonds. Gabi asks her product structuring team to devise a strategy that will benefit from rising interest rates. She is impressed by the complex product they produce which uses a combination of putable bonds, buying bonds with warrants attached and selling the warrants and selling T-bill futures. Gabi markets the fund and illustrates the returns that would be expected under a series of different higher-yield scenarios. She clearly states that this is modelled – as opposed to actual – data. She does not describe the process in detail citing its complexity and proprietorial nature. She also states that – in her opinion – there is no downside risk as the path of interest rates is set to increase. Has there been a breach of the code and standards?
A. No; she has clearly indicated this is model data B. No; she has clearly stated that it is her opinion that interest rates will rise. Clients of the opinion rates will fall or stay on hold can avoid the product. C. Yes; her report fails to adequately describe the characteristics of the actual and implied risks of the investment product.
9.
Why were the GIPS created?
A. To standardise ing standards globally B. To penalize insufficient disclosure of information C. To allow investors to make meaningful comparisons between firms
10.
To claim compliance with GIPS a firm must?
A. State that it is compliant B. Ask their compliance officer to confirm compliance C. Hire an independent third party to compliance
11.
Jonny Uden is the Chief Investment Officer of Melrose Asset Management, a large whole-market equity fund. The firm has recently lost a number of key personnel who specialized in the small- and medium-cap sectors of the market. Given volatile market conditions, Jonny decides that his best course of action is to sell off the small-cap and medium-cap holdings and concentrate in large-cap stocks. Jonny identifies suitable fund managers for these small- and mid-sized stocks and allocates the appropriate share of the total funds. He then instructs his firms’ marketing department to notify all clients of the reason for the change, that there will be a net reduction in portfolio costs and the basis for selecting the fund managers. He then instructs senior portfolio managers to clients directly, ing first those clients with the highest assets under management
A No. B. Yes; if Melrose is established as an equity fund it is not permitted under the code and standards to use secondary managers. C. Yes; Jonny failed to obtain client approval prior to the change in mandate and because he is not ensuring that clients are being communicated with fairly.
12.
Which of the following can claim compliance with GIPS?
I
Asset managers
II
Investment Consultants
III
Performance Measurement Software Providers
A. I only B. I and II only C. I and III only
13. Lotte Sondstroem has recently been appointed as the Chief Investment Officer of JSM Investments. The firm has promoted itself as aiming to outperform its benchmark by running aggressive, actively-traded funds with a very high portfolio turnover rate to capture market mis-pricings. A combination of poor decisions and high transaction costs has left JSM in the bottom quartile of performance for each of the last four years. Lotte instructs that the firm reduces its portfolio turnover rate significantly and adopt a Core-Satellite approach .This involves holding a portfolio which largely replicated the index and then taking active bets on a few instances where they are confident of a mispricing. Lotte reasons the reduced transaction costs will increase net-of-fees returns to investors. Lotte updates the marketing material for new clients and will fully disclose the change to existing clients when they receive their annual statement. Is there a breach of the Code and Standards? A. Yes; Lotte has failed to notify her clients of the change in investment methodology in advance B. Yes; Lotte has failed to notify her clients of the change in investment methodology in a timely manner C. No; Lotte is acting in her clients’ best interests and in line with the semi-strong form of the Efficient Market Hypothesis
14.
Which of the following statements is true?
A. Portfolios should be added to composites as soon as the portfolio’s investment return characteristics are known. B. Portfolios should be added to composites as soon as the client’s investment objectives are known. C. Portfolios should be removed from composites as soon as the portfolio is terminated.
15 Dan Maddocks is Head of Trading at CherryWood investments. On 8 November CherryWood send out a research note on Pluriel Inc, changing their recommendation from Neutral to Outperform. On 9 November they receive an order from a full-service client (who was sent the report) to sell Pluriel. Dan should A. Process the order as it is an execution only instruction from a client B. Refuse to process the order as it contrary to the firm’s own recommendation. C. Process the order having explained the recent change in recommendation.
16.
Mary Nicol is the Head of Research at Four Square Capital (FSC). She is approached by the Head of Investment Banking at FSC and asked to change an investment recommendation on NWK, a firm on which FSC provides research coverage, from Sell to Buy. The Sell recommendation is inconsistent with FSC acting as a t book-runner on a rights issue being offered by NWK. Mary’s best course of action would be to:
A. Appoint a new analyst to check whether the initial recommendation for NWK was correct or needed to be updated B. Discontinue offering coverage on NWK but responding to requests for factual information from clients to whom the research had already been given. C. Change the investment recommendation in line with FSC Investment Banking recommendation.
17. Pam Ring has been appointed a supervisor in her firm. Many, but not all, of those she supervises are subject to the CFA ® Code and Standards. Which of the following statements is true? A. She can only delegate responsibilities to those subordinates who are covered by the Code and Standards B. She is able to delegate responsibilities to all of her subordinates and is required to monitor all subordinates. C. She is able to delegate responsibilities to all of her subordinates but would only be required to monitor those subordinates who are not covered by the Code and Standards
18.
Toby Logan has been appointed to manage the Occupational Pension Scheme of Ealing Media. His duty of loyalty, prudence and car is due to:
A. The shareowners of Ealing Media B. The trustees of the Ealing Media Occupational Pension Scheme C. The and beneficiaries of the Ealing Media Occupational Pension Scheme
The following 14 questions relate to Quantitative Methods
19.
Which of the following correctly calculates the Sharp ratio of risk-adjusted returns?
A. Residual Return divided by Residual Risk B. Return in excess of the risk-free rate all divided by the risk of the market C. Return in excess of the risk-free rate all divided by the risk of the portfolio.
20.
The sum of deviations from the mean is zero for the
A. Sample and population means B. Geometric and harmonic means C. Weighted average mean and mode
21.
A ‘fat-tailed distribution’ could also be described as which of the following?
A. Leptokurtic B. Platykurtic C. Mesokurtic
22.
Regarding Technical Analysis which of the following statements is true?
A. When a short-term moving average crosses from underneath a longer-term moving average the movement is considered bearish and is known as a dead cross B. When a short-term moving average crosses from above a longer-term moving average the movement is considered bullish and is known as a golden cross C. A longer-term investor using Bollinger bands as part of their strategy would be likely to buy securities that had broken through the lower Bollinger band
23.
Which of the following portfolios maximizes Roy’s Safety First criterion, if your threshold return is today’s inflation rate of 3%?
A. Expected Return 12%, Variance 9% B. Expected Return 16%, Variance 16% C. Expected Return 8%, Variance 4%
24.
Given a stated monthly rate of 0.33333%, what is the effective rate with continuous compounding?
A. 1.04081% B. 4.08108% C. 5.45979%
25.
What is the main advantage of Monte Carlo over historical simulation?
A. It uses actual data B. It does not need detailed estimates of parameters C. It can explore hypothetical “what if” scenarios
26.
The Student’s t-distribution is best described as being
A. Symmetrical, thinner tailed than a normal distribution, n-2 degrees of freedom B. Asymmetrical, fatter tailed than a normal distribution, n-1 degrees of freedom C. Symmetrical, fatter tailed than a normal distribution, n-1 degrees of freedom
27.
A type one error involves:
A. Accepting a false null hypothesis and is less likely with a higher level of significance B. Rejecting a true null hypothesis and is less likely with a higher level of significance C. Rejecting a true null hypothesis and is less likely with a lower level of significance
28.
When the population variance is known and normally distributed, which test for its mean is most appropriate?
A. Z test B. T test C. Chi squared test
29.
A B C 30.
To test whether two populations have the same variance, which test is used, and what shape is its distribution? Test
Shape of Distribution
F Test F Test Chi Squared
Symmetrical Asymmetrical Asymmetrical
What is the minimum value for the Chi Squared statistics and F statistics?
A. 0 B. 3 C. Infinitely negative
31.
Gala Nasr is saving for retirement. She is currently 40 years old and intends to retire fully at 65 having cut down on her work once she reaches 60. She intends saving $20,000 at the end of each year until she is 60 (20 payments). When she reaches 60 her salary will be reduced to cover her living expenses but not provide for further saving however her pension fund will grow throughout at 7%. The amount available on her 65th birthday to purchase a pension will be closest to:
A
$819,909.84
B
$1,149,965.97
C
$1,264,980.75
32.
Smarts Msimang is planning for his retirement. Smarts is celebrating his 25th birthday by doing some retirement planning. He considers that he will be able to afford savings of $1,500 at the end of each of the next 15 years and is willing to take risks in order to earn a return of 11% over this time. He considers that when he is in his 40s he will be able to save more but take less risk. He wishes to retire at 65 and with a pension fund of $750,000. Assuming he can earn an 8% return in this second saving phase what should Smarts be aiming to save in this second 25-year period?
A
$5,424.51
B
$5,858.47
C
$15,093.66
The following 12 questions relate to Economics 33.
Which of the following would appear to be correctly specified as a supply function?
A
Q = -7 + 25Price – 14 Input costs
B
Q = -7 + 25Price + 14 Input costs
C
Q = -7 - 25Price – 14 Input costs
34.
Calculate the four firm concentration ratio and the Herfindahl-Hirschman concentration index for the following industry. Mobile Networks Orange T Mobile O2 Vodafone
Market Shares (%) 15 20 25 30
A.
75, 0.2150
B.
90, 0.2150
C.
90, 0.2850
35.
Which of the following statements is true?
A
For inferior goods, the income and substitution effects are reinforcing
B
For Giffen goods, the income effect can offset the substitution effect
C
For Giffen goods, the income effect does offset the substitution effect
36.
Which of the following are best described as renewable natural resources?
A.
Norwegian water reserves
B.
Liquid, transportable, natural gas from Qatar
C.
Industrial coking-grade coal used for steel making
37.
You are required to compute a Laspeyre index to base 100 for the following twoproduct basket
Pizza Pasta
Price (Base year) 5 1
Quantity consumed (Base year) 20 50
Price (Current) 7.5 1.25
Quantity consumed (Current) 15 60
A
125
B
138.89
C
141.67
38.
How many and which of the following biases are most likely to lead reported I figures to overstate inflation? I Quality change bias II New goods bias III Commodity substitution bias
A.
I only
B.
I and III only
C.
I, II and III
39.
Why might real GDP differ from potential GDP in the macroeconomic short run?
A.
All money prices are sticky
B.
Some money prices are sticky
C.
Some real prices are sticky
40.
To tighten monetary policy, the Federal Reserve is most likely to
A.
Increase the discount rate
B.
Use open market operations to sell Treasury Bills
C.
Increase required reserve ratios
41.
A government expenditure stimulus, delivered as part of a balanced budget multiplier will most likely
A.
Be counterproductive, due to the crowding out effect
B
Be expansionary, provided household Marginal Propensity to Consume is >1
C
Be successful provided household Marginal Propensity to Consume is <1
42.
If money supply increases by 10% and the velocity of money reduces by 5%, given that output is in the short term fixed, the most likely change in the price level is?
A. 0% B. +5% C. -5%
43 You are required to compute a 6 month forward rate for USD/GBP given a spot rate of USD/GBP 1.5275 a 4% UK interest rate and a 2% US interest rate The 6 month forward rate would be closest to: A USD/GBP 1.5426 B USD/GBP 1.4981 C USD/GBP 1.5125
44 According to the Riccardian model of international trade, countries should specialise in the production of items in which the country has A An absolute advantage B A comparative advantage C A relatively greater abundance of the factor of production required to make that item
The following 34 questions relate to Financial Reporting Analysis and Corporate Finance 45.
At the end of an ing period a law firm reports chargeable hours worked as revenue in the Income Statement, before the client has been billed for the work. Which of the following statements is true?
A. The unbilled revenue would also be shown on the balance sheet as an asset B. The unbilled revenue would also be shown on the balance sheet as a liability C. This would be an example of aggressive ing and low financial reporting quality
46.
Which of the following is not a common approach to the creation and maintenance of Financial Reporting Standards?
A. A rules-based approach B. A principles-based approach C. An asset/liability approach
47.
Matt Leedham is an analyst who covers the aviation sector. Most airlines which he follows use lease finance to acquire their fleet of aircraft with around 50% of firms reporting their leases as Operating Leases and the rest as Capital (Finance) leases. Which of the three classifications of cash flow could be compared directly, without having to make any adjustment for the type of lease classification?
A. Investing Cash Flows B. Operating Cash Flows C. Financing Cash Flows
48.
Where would you be most likely to find disclosures of a company's significant ing policies?
A. Footnotes B. FASB website C. Management Discussion and Analysis
49.
In 2008 ROS Properties bought land for $6,000,000. They have successfully applied to have its permitted use changed to residential and sold it in 2014 to Becca Developers for $15,000,000. Becca will pay $3,000,000 as a down-payment with the balance payable in two years time when they hope to have sold on the completed development. What profit is ROS Properties able to report in 2014 under the installment method?
A. Nil B. $1,800,000 C. $9,000,000
50.
Throughout its financial year 2014 Fountain Engineering had 100,000,000 shares outstanding. They also had issued to employees 200,000 stock options with an exercise price of $25. The average market price over the year was $40. When computing diluted earnings per share the number of shares to be used in the denominator is closest to?
A. 100,000,000 B. 100.075,000 C. 100,120,000
51. Which of the following would most likely reduce a recorded pension fund liability? An increase in A Inflation B Life expectancy C Interest rates
52.
Which of the following statements is true?
A. Cross sectional analysis uses a vertical common size statement and time series analysis uses a horizontal common size statement. B. Cross sectional analysis uses a horizontal common size statement and time series analysis uses a vertical common size statement. C. Cross sectional analysis uses a vertical common size statement and time series analysis uses a vertical common size statement.
53.
The lowest debt ratio (by numeric value) for most companies is likely to be
A. Debt to equity B. Debt to total assets C. Debt to net assets
54.
Credit rating analysts are most likely to look at which of the following ratios?
A. Price to earnings B. Price to Cashflow ratios C. EBITDA interest coverage
55.
Which of the following is the most conservative measure of liquidity?
A. Cash Ratio B. Quick Ratio C. Current Ratio
56.
Acre Agriculture reported a salary expense of £3,000,000 for the year, opening salaries payable of £200,000 and ending salaries payable of £120,000. Cash paid to employees is closest to:
A. £2,920,000 B. £3,080,000 C. £3,200,000
57
Dagmar Inc. recently reported deferred tax assets of $325,000 and deferred tax liabilities of $430,000. These values are similar to those reported in previous years. Dagmar anticipates a reduction in the rates of tax payable. This would result in:
A. A strengthening of the balance sheet but an increased tax expense B. A strengthening of the Balance Sheet and a reduced tax expense C. A weakening of the Balance Sheet and a reduced tax expense
58.
What will be the most likely relationship between pre-tax operating cash flow and the reported tax expense for a firm reporting using LIFO, compared to a firm which uses FIFO but is in all other respects identical? A B C
59.
Pre-tax Operating Cash Flow Same Same Higher
Tax Expense Lower Higher Same
In pension ing which of the following is likely to have the smallest impact on the reported pension expense?
A Interest expense B Service cost C Actuarial gains/losses
60.
Impairment losses are most likely to impact which of the following primary financial statements?
A. Income statement and Statement of Cash Flows B. Income Statement and Balance Sheet C. Statement of Cash flows and Balance sheet
61.
Crescent Circuits is engaged in a business where it receives cash from customers which is taxable on receipt but not recognized in the Income Statement until the customer receives delivery of the completed product. This is most likely to result in:
A. A deferred tax asset and a current asset of deferred revenue B. A deferred tax liability and a current asset of deferred revenue C. A deferred tax asset and a current liability of deferred revenue
62.
Two years ago, Glendale Golf issued a 10-year bond paying a fixed 7% coupon and callable at par on the coupon payment dates 1, 3 and 5 years prior to maturity. The bond was issued at par but yields have steadily fallen.
An analyst using the amounts recorded on the firms Balance Sheet is most likely to: A. Have a proper understanding of the firms liabilities B. Be over-estimating the value of the firms liabilities C. Be under-estimating the value of the firms liabilities
63.
Which of the following would most likely be classified as an Investment Property?
A. A construction firms completed properties being held for resale B. A major multi-national buying the freehold of an iconic city centre building for prestige and long-term capital appreciation C. A warehouse purchased under a finance lease and being rented out to a number of small tenants.
64.
ELM operate a defined benefit pension scheme which has plan assets with a fair market value of $20m and pension benefit obligations with a present value of $22m. How would the pension scheme be reflected on ELM’s Balance Sheet?
A. The Balance Sheet would report the plan assets and plan liabilities as a single line item (liability $2m). B. The Balance Sheet would report two separate line items, one for the plan assets and the other for the plan liabilities C. The Balance Sheet would report only the $22m liability as ELM does not have the right to use the pension schemes plan assets
65.
Under US GAAP bonds issued with warrants are ed for
A. As two separate securities B. In the same way as a convertible bond is treated under US GAAP C. In the same way as straight corporate debt
66.
You have gathered the following data from the footnote disclosures of Willoughby Industries. Inventory LIFO Reserve Tax Rate Cost of Goods Sold Operating Income Net Income
2014 $130,000 $38,000 20% $1,365,000 $226,000 $53,000
2013 $120,000 $35,000 20% $1,235,000 $232,000 $51,000
What figure should be reported as the FIFO-equivalent inventory value for 2014? A. $155,000 B. $133,000 C. $168,000
67.
Which of the following would be considered a form of off-balance sheet financing?
A. The use of operating leases B. The with-recourse sale of s receivable C. The issue of zero-coupon bonds
68.
Tom Logan, an analyst, gathered the following information about a firm (£Millions)
Cost of Fixed Asset Investments Accumulated Depreciation Expense
2013 5.6 2.4
2014 5.6 3.2
At the end of 2014 the best estimate of the firm’s average age and depreciable life of its assets is:
A. B. C.
Average Age 1.75 years 3.33 years 4 years
Depreciable Life 7 Years 6 years 7 years
69.
Which problems may arise from the IRR investment criterion for projects with positive cash flows, after negative cashflows, after positive cashflows?
I No IRR solution II Multiple IRR solutions A. I B. II C. Both I and II
70.
Clifton Inc currently operates with a WACC of 12.2%. equity comprises 60% of the Capital Employed with the remainder coming from debt at an after tax cost of 8%. They are considering issuing $50m in new equity to finance a major expansion. They are of the opinion that investors would require a return of 12% on the newly issued equity when they learn of the low-risk and cash-generative nature of the new project. The advisors to the issue will charge a fee of 3%. Assuming the new equity can be issued with a 12% required return, which of the following is true? A. There will be no relevant cash flow to consider but a reduction to the firms WACC B. There will be a relevant cash flow to consider but no adjustment required to the firms WACC C. There will be a relevant cash flow to consider and a reduction to the firms WACC
71.
Which of the following is best described as a primary source of liquidity?
A. Trade credit B. Asset liquidations C. Bankruptcy protection
72.
For large, followed and highly rated businesses which is most likely cheapest source of short term funding?
A. Commercial paper B. Discounted receivables C. Non-bank finance companies
73.
When it comes to hiring third party consultants, best practice suggests that directors:
A. Should be able to subject to management approval B. Should be able to subject to executive directors approval C. Should be able to without approval from any management executives
74.
Related party transactions must be disclosed in
A. Proxy reports B. Annual reports C. All communications with shareowners
75.
Which of the below correctly completes this sentence?
From a shareholder perspective, golden parachutes, greenmail and poison pills are____ A. Useful defences against hostile bids B. Designed to maximise shareholder value C. Potentially damaging to shareholder interests
76.
Gezo Inc raises capital in both the equity and fixed income markets. Using the data in the table below the appropriate weights to use when computing the firms WACC would be:
Number in issue Nominal value Issue price Market price
Shares
Bonds
2,000,000 $1 $10 $11
50,000 $1000 $1010 $990
A.
4% equity; 96% debt.
B.
28% equity; 72% debt
C.
31% equity; 69% debt
77.
Last year Fratelli BV had sales of €65m. Helen Archer, an analyst, forecasts sales growth will be 3%, EBITDA margin to be 35%, interest of €2.4m, depreciation to be €1.8m and taxes at 20% If Fratelli has 1m shares in issue and trades on a leading P/E multiple of 7x its shares should be worth?
A. €103.88 B. €107.70 C. €134.63
78.
Porters plc has a current ratio of 2.0 and a quick ratio of 1.5. Its current liabilities are £75m. Its inventory should be closest to:
A. £37.5m B. £62.5m C. £75m
The following 36 questions relate to Asset Valuation
79.
You buy 1000 Microsoft at $30 per share on 50% initial margin and 25% maintenance margin. What Microsoft share price would trigger a margin call? And what profit would you earn (ignoring margin interest and brokerage) if an investor who had purchased outright Microsoft shares at the same time made a 25% return?
A. $11.25; $22,500 B. $20; $22,500 C. $20; $7,500
80.
The Korean stock-market has very high trading volumes and very low trading costs commissions, taxes and spreads are all low. Yet sometimes stocks take a few days to reprice in response to significant news about global investors block trades. Which statement most accurately describes this market? I This market shows internal efficiency II This market shows external efficiency
A. I only B. II only C. Both I and II
81.
Which of the following statements is true?
A. Commodity indices are based on the weighted-average market price of a basket of commodities B. Replicating a commodity index is relatively easy provided the portfolio of commodities held at the start of the period reflects the weights used in the index calculation C. Commodity indices frequently have low correlations to the performance of the underlying commodities
82.
Which of the following would be a valid criticism of a free-float adjusted market capitalization equity index?
A. The shares available to trade can change over time leading to index volatility B. The free-float adjusted index will be difficult to replicate as the portfolio manager might not know the proportions of each constituent stock to hold C. The shares in the index that rise in value have an increasing weight in the index and may cause investors to become overweight in securities that are overvalued and underweight in securities that are undervalued
83.
You are considering making an investment in IOS stock; a firm where you would require a 9% return. IOS has just paid a dividend of $4 and you expect this dividend will grow at the foreseeable future at 5%.IOS’ Weighted Average cost of Capital is 8%. Using the dividend Discount model the price you should pay is closest to?
A. $100 B. $105 C. $140
84.
A carbon emissions trading exchange is expected to grow free cash flow to equity of $2 share by 25 percent a year for the next two years, and 15 percent a year for the following two, before being taken over in 4 years time by a larger exchange for $10 per share. The weighted average cost of capital is 8 percent and the required return on equity is 12 percent. What is the most accurate valuation?
A. $ 15.99 B. $ 16.26 C. $ 18.23
85
AWM is a software firm that develops specialist software used in ophthalmic medicine.to diagnose and record the progress of patients’ eye disease. The firm’s main customers are European state-owned health services. It was formed when three highly skilled developers broke away from a larger software group several years ago and has now grown to employer over 200people, including 32 industry-recognized experts. AWM regularly makes low profits. Management would prefer higher profits but on-going software development, required to stay ahead of the firms three main rivals, is expensive. According to Porter’s Five Forces model AWM operates in an industry with
A High supplier power, but low threat of new entrants B High buyer power and high supplier power C High buyer power and a high threat of new entrants
86
A market has the following limit orders. Buyer Ken Jim Mike
Bid Size 450 500 300
Limit Price 19.66 19.68 19.71 19.72 19.73 19.84 19.99
Offer Size
Seller
250 150 400 800
Rita Sue Bob Tzhu
Alexandra places a day order to sell 600, Limit 19.68. Assuming no other orders are placed for the stock that day the average price Alexandra will get is closest to? A £19.67 B £19.68 C £19.70
87.
Shares in ECM are currently trading on a forward P/E multiple of 5.2. The firm generates growth consistent with a Return on Equity of 12% and a Dividend Retention Rate of 30%. If investors require a return of 15% ECM’s justified P/E multiple using the DDM and your trading decision would be, assuming you are permitted to sell ECM stock short?
A B C
88.
Justified P/E 4.55 6.14 6.14
Trading Decision Sell Sell Buy
Price to book value is the most appropriate valuation measure for which of the following companies?
Advertising Agency Large Media/Entertainment Group (no longer going concern) Global Logistics firm A. Advertising agency B. Media/Entertainment Group C. Global Logistics
2013 Net Income (£m) 12.8
2014 Net Income 99.3
--23.2
Ceased trading;
14.2
14.4
89.
Calculate the most accurate figure that is closest to price to book value for the common stock of the following firm.
Shares at 1st January 2013 Tangible Shareholder's equity at 31 Dec 2013 Intangible Shareholders equity Preferred stock at 31 Dec 2013 Share buy backs during 2013 Rights issue during 2013 Share price at 31 Dec 2013
500,000 $60 million $75 million 15 million 200,000 100,000 $240
A. 0.8 B. 1 C. 2.133
90.
Given the following data is the most accurate estimate of earnings growth for the Japanese stock market? Dividend payout rate 40%
Net profit margin 2%
Asset turnover 6
Financial Leverage 3
A. 14.4% B. 21.6% C. 36% 91.
Given the following stated spot rates and forward rates you are required to compute the stated annual forward rate for the six-month starting in two years’ time Time period 6 month 12 month 18month 24 month 30 month 36 month
A 2.4% B 4.8% C 6.2%
Spot Rate 3.2% 3.4% 3.6% 3.8% 4.0% 4.2%
92.
A futures market is most likely to be in backwardation where
A Prices are reasonably stable B The convenience yield is high C The convenience yield is low.
93.
Which of the following would not be classified as an Alternative Investment?
A. Shares in an Exchange Traded Fund investing in Commodities B. Shares in a commodity consumer C. Physically holding a commodity such as gold, silver or other precious metals.
94.
A wealthy investor has a choice of investing $100,000 directly into each of 10 separate hedge funds or $1,000,000 into 1 fund-of-hedge-funds. Which of the following would most likely be an advantage of investing in the fund-of-funds compared to the individual funds?
A The fund-of-fund structure should give a diversification benefit improving the net-of-fees returns to the portfolio. B The fund-of-fund structure is likely to offer better redemption C The fund-of-fund structure is more suitable for individual investors; most hedge funds are only permitted to accept money from institutional clients only.
95.
Which of the following hedge fund features would not be considered an advantage to a hedge fund investor?
A A side pocket B A hurdle rate C A water mark
96.
If your opinion is bearish, neutral and bullish on Barclays Bank stock, which options, if any, would you be most likely to BUY in each case?
A. Puts, none, calls B. Calls, none, put C. Puts, puts and calls, calls
97.
The Northern Rock share price is 600p when an option changes hands. A 550p put option costs 50p to buy. What is the most accurate figure for the maximum profit if you buy the put and the maximum loss if you sell it? Assume it is held to expiry.
A. 500p, -500p B. 550p, -550p C. -600p, infinite
98.
Interest rates are so low in Japan that you borrow Yen 100,000,000 fixed at 1% for three years. You enter a fixed for fixed currency swap with Credit Suisse, swapping the Yen in return for SFR 1,000,000 at a fixed 2% interest payable yearly in advance. The Swiss franc appreciates ten percent against the Yen by the end of first year and thirty percent when the swap terminates at the end of the third year. What are the most likely payments you make to Credit Suisse at the end of years one and three?
A. SFR20 000 SFR 1 million B. SFR20,000, SFR1.3 million C. SFR10,000; SFR1 million
99.
Which most accurately describes a limited risk strategy for profiting from a view on interest rates?
A. Buy a cap for falling rates. Buy a floor for rising rates B. Buy a cap for rising rates. Buy a floor for falling rates C. Sell a cap for falling rates. Sell a floor for rising rates.
100
Which of the following would be an end of derivatives and which would be a dealer? X Citigroup wants to hedge its floating rate interest rate risk with a $US20 billion swap. Y Nigeria’s central bank seeks to make a 0.02 percent profit from the bid ask spread on a currency swap Z the World Bank needs to fix its Tanzanian Schilling exchange rate to fix the costs of building a bridge
A. X dealer, y and z end B. X and z end , y dealer C. X end , y and z dealer
101.
You purchase a 1X4 FRA at 3% on a notional principal of $1,000,000. At expiry the 90 day LIBOR rate is 6%. Which figure is closest to your profit or loss?
A. -$7,389 B. $7,444 C. $7,389
102.
Is the repo rate likely to be higher or lower than bank borrowing rates? Why is it most likely to differ from bank borrowing rates?
.A Lower, because its overnight B. Lower, because it’s collateralised C. Higher, because it’s not collateralised
103.
Moody’s says it wants to cut credit ratings on Greek Government bonds. This is best described as an example of which type of risk?
A. Default B. Downgrade C. Credit Spread
104.
If you are a US investor what is the main extra risk to you take on buying a Coca Cola bond paying coupons in Japanese Yen?
A. Japanese political risk B. Japanese sovereign risk C. Yen foreign currency risk
105.
Which of the following is best described as event risk?
A. An issuer is taken over B. An issuer calls back a bond C. Inflation rates accelerate rapidly
106.
An asset-backed security generally requires
A. Backing by hard tangible assets such as property B. A special purpose vehicle to hold the collateral remotely from the issuer C. Credit enhancements such as external guarantees or internal over-collateralization
107.
Tom Logan, a fixed income analyst, states: “All bonds have positive convexity apart from callable bonds in a rising yield environment” Julian Cooke, another analyst, states: “MacAulay duration should only be used to measure the interest rate risk of bonds with embedded options” Who is correct?
A
Tom but not Julian
B
Julian but not Tom
C
Neither Tom nor Julian.
108.
The price of a three year zero-coupon bond with a stated annual yield to maturity of 4.5% is closest to:
A. 87.50243 B. 87.62966 C. 93.12759
109.
Given the following term structure the price of a 2 year zero coupon bond is closest to:
Maturity 6 months 12 months 18 months 24 months 30 months 36 months
Stated Spot Rate (%) 4 5 6 7 8 9
A. 86.94432 B. 87.14422 C. 87.34387
110.
Using the term structure from question 109, the price of a two-year semi-annual10% coupon bond is closest to:
A. 101.38096 B. 105.95064 C. 105.73817
111.
Using the term structure from question 109 the 6 month forward rate starting in 24 months time is closest to:
A. 6.02% B.11.75% C.12.04%
112.
A callable bond is likely to have a z-spread which is
A. Less than its option adjusted spread B. More than its option adjusted spread C. Equal to the option adjusted spread but higher than its nominal spread
113.
Julian Cook, an analyst, states “When interest rates rise dramatically callable bonds will exhibit negative convexity”. He goes on to state “The higher the level of interest rates the higher the price volatility of a bond for any further interest rate changes” Julian is:
A. Correct with respect to negative convexity and correct with respect to price volatility B. Correct with respect to negative convexity but incorrect with respect to price volatility C. Incorrect with respect to negative convexity and incorrect with respect to price volatility
114.
Which bond will have the highest convexity?
A. A 5 year 3% coupon bond with a YTM of 8% B.A 10 year 3% coupon bond with a YTM of 5% C. A 10 year zero coupon bond with a YTM of 5%
The following 6 questions relate to Portfolio Management 115. The market portfolio contains: A. An Equal weighted combination of all risky assets B. A Market value weighted combination of all risky assets C. A Mean-Variance Optimized combination of all risky assets
116 A policy statement can help with A. Performance evaluation B. Performance measurement C. Performance verification checks
117. Older people are likely to have: A. Lower risk appetite and lower liquidity requirements compared with younger people B. Lower risk appetite and higher liquidity requirements compared with younger people C. Higher risk appetite and higher liquidity requirements compared with younger people
118. Capital appreciation is best described as a desire to grow investments A. Faster than the risk free rate B. Faster than the rate of inflation C. Faster than the S&P500 us equity index
119. What is the standard deviation of the following two asset portfolio? Asset Expected Return Standard deviation Weight Covariance
1 12% 16% 30%
2 15% 19% 70% 91.2
A. 8% B. 13% C. 15%
120. What percentage of funds returns over time can be explained by their target asset allocation policy? A. 50% B. 70% C. 90%
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