cfa level i revision day i

8/13/2019 CFA Level I Revision Day I

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CFA Level I Revision Class

Ethics Quantitative techniques Economics

Derivatives

This files has expired at 30-Jun-13


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Questions 1 Ethics

According to the Standards of Practice Handbook , a member who is an investment manager is mostlikely to breach his duty to clients by:

A. Habitually voting with management on proxies that relate to non-routine governance issues.B. Disclosing confidential client information to the CFA Institute Professional Conduct Program.

C. Using client brokerage to purchase goods or services that are used in the investment decision-makingprocess.



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Questions 1 Answer

A fi duciary who votes blindly with management on non-routine governance issues may breach theirduty to clients by violating the standard that relates to loyalty, prudence, and care.



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Questions 2 Ethics

Kim Li, CFA, is a portfolio manager for an investment advisory firm. Li delegates some of hersupervisory duties to Janet Marshall, CFA, after educating Marshall on methods to prevent and detect

violations of the firm's compliance procedures. Despite these efforts, Li discovers that an employeereporting to Marshall may have violated the law. According to the Standards of Practice Handbook ,Li's initial course of action must be to:

A. Suspend Marshall from her supervisory duties.

B. Initiate an investigation to determine the extent of the wrongdoing.

C. Demand that the employee involved provide assurances that the activity will not be repeated



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Questions 2 Answer

A supervisor may delegate supervisory responsibilities, but such delegation does not relieve them oftheir supervisory responsibility; Li must immediately begin an investigation of the matter to ascertain

the extent of the wrongdoing. Relying on assurances from the employee or simply reporting themisconduct up the chain of command are not enough.



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Questions 3 Ethics

Meryl Mamet, CFA, manages an emerging markets fund which has generated annual returns of 30%for the past three years. Mamet distributes a marketing brochure which includes the following

statement "My investment expertise has generated annual returns of 30% for the past three years andyou can expect a similar rate of growth over the next two years." Does Mamet violate any CFA InstituteStandards?

A. Yes, because the performance should be stated net of fees.

B. Yes, because the returns must include terminated accounts.

C. Yes, because the presentation makes assurances regarding investment Performance.



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Questions 3 Answer

Members must not knowingly make statements of assurances or guarantees regarding an investment.



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Questions 4 Ethics

Crandall Temasek, CFA, filed for personal bankruptcy two years ago after incurring large medicalexpenses. He was hired recently as a portfolio manager. According to the CFA Institute Standards,

must Temasek disclose his bankruptcy filing to his new employer?A. Yes, because bankruptcy represents a potential conflict of interest.

B. Yes, because bankruptcy reflects poorly on his conduct and character.

C. No



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Questions 4 Answer

Members who are involved in a personal bankruptcy filing are not automatically assumed to be inviolation of the standards because bankruptcy may not reflect poorly on the integrity or trustworthiness

of the person involved.



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Questions 5 Ethics

The Global Investment Performance Standards (GIPS) were created to:

A. Educate investors on misleading practices in performance measurement.

B. Ensure fair representation and full disclosure of performance information.C. Impose CFA Institute Standards of Professional Conduct on nonmembers



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Questions 5 Answer

In the past, the investment community had great difficulty making meaningful comparisons on the basisof accurate investment performance data. The GIPS standards ensure fair representation and full

disclosure of performance information.



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Questions 6 Ethics

Vera Abel, CFA, is the research director for ZigZag Investments. Abel discovers one of her topanalysts trading in stocks in advance of client transactions and repeatedly warns him that this activity is

not appropriate. Does Abel violate any CFA Institute Standards of Professional Conduct?A. Yes, with respect to fair dealing.

B. Yes, with respect to responsibilities of supervisors.

C. Yes, with respect to diligence and reasonable basis.



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Questions 6 Answer

The Standards require that members make reasonable efforts to detect and prevent violations ofapplicable laws, rules, and regulations. Supervisors exercise reasonable supervision by establishing

and implementing written compliance procedures and ensuring the procedures are followed throughperiodic review. Once a supervisor learns of a possible violation, the supervisor must promptly initiatean investigation. Warning the employee to cease the activity, as Abel has done, is not enough.Pending the outcome of the investigation, Abel may need to place limits on the employees activities toensure the violations will not be repeated.



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Questions 7 Ethics

Eric Pantoja is enrolled as a candidate in the CFA examination program. He works as an assistant forChehalis Investments (CI). Pantoja sees CI's purchase list and purchases several of the recommended

stocks. Pantoja least likely violates the CFA Institute Standard relating to:A. Loyalty to Employer.

B. Priority of Transactions.

C. Diligence and Reasonable Basis.



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Questions 7 Answer

Pantoja least likely violates the Standard relating to Diligence and Reasonable Care because he istaking investment actions on his own behalf rather than on behalf of clients. His actions violate the

Standards relating to Priority of Transactions (he trades ahead of his employer and its clients), Loyaltyto Employer (his actions cause harm to his employer), and Misconduct (his actions reflect adversely onhis professional integrity).



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Questions 8 Ethics

According to the Standards of Practice Handbook , members are least likely required to disclose toclients their:

A. Beneficial ownership of stock.B. Firm's market-making activities.

C. Responsibilities as CFA Charterholders.



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Questions 8 Answer

Members are not required to disclose their responsibilities as CFA charterholders to clients. They are,however, required to disclose all matters that could reasonably be expected to impair their

independence and objectivity or interfere with respective duties to their clients, prospective clients, andemployer. Service as a director, market-making activities, and beneficial ownership of stock are threeexamples of such matters.



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Questions 9 Ethics

Ron Dunder, CFA, is the CIO for Blind Trust (BT), an investment advisor. Dunder recently assignedone of his portfolio managers, Doug Cheetah, to manage several accounts that primarily invest in thinly

traded micro-cap stocks. Dunder soon notices that Cheetah places many stock trades for theseaccounts on the last day of the month, toward the market's close. Dunder finds this trading activityunusual and speaks to Cheetah, who explains that the trading activity was completed at the client'srequest. Dunder does not investigate further. Six months later the SEC sanctions BT for manipulatingmicro-cap stock prices at month-end in order to boost account values. According to the Standards ofPractice Handbook, did Dunder violate any CFA Institute Standards of Professional Conduct?

A. No

B. Yes, because he failed to review regulations on thinly traded securities.C. Yes, because he failed to reasonably supervise Cheetah with a view to detecting and preventing

Cheetah's violations



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Questions 9 Answer

The CFA Institute Standard relating to responsibilities of supervisors requires members/candidates totake steps to detect and prevent violations of laws, rules, and regulations. Dunder failed in his

supervisory role when he accepted Cheetah's explanation of the unusual trading activity. Dundershould have reviewed the client's goals and objectives, and records, to see if they in fact requestedmonth-end trading. Regardless of the explanation provided by Cheetah, Dunder should haveinvestigated further. This area is ripe for conflicts of interest because it influences the month-endvalues of client accounts and therefore the manager's performance and fees



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Questions 10 Ethics

According to the CFA institute standards of practice handbook, insider trading is least likely to beprevented by establishing:

A. Fire wallsB. Watch lists

C. Selective disclosures



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Questions 10 Answer

Selective disclosures occurs when companies discriminate in making material nonpublic informationpublic. Selective disclosures raises insider trading concerns.



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Questions 11 Quantitative Techniques

Rachel Kelly, age 24, is planning for retirement. Kelly's annual consumption expenditures are currently$30,000. She assumes her consumption expenditures will increase with the rate of inflation, which she

expects to average 3% until she retires at age 68. Given a life expectancy of 83 years and constantexpenditures in retirement, the amount Kelly must accumulate by her retirement date, assuming an 8%rate of return on her retirement account, is closest to:

A. $423,000.

B. $1,176,000.

C. $1,552,000.



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Questions 11 Answer

Kelly expects her consumption spending (currently $30,000 annually) to increase with the rate ofinflation (3%) over the next 44 years until she retires. Her annual consumption spending at the time

she retires will be $110,143.57 (PV = 30,000, %I = 3, N = 44, solve for FV). To support that level ofspending for 25 years of retirement, assuming an 8% return on her retirement account, she mustaccumulate $1,175,756 by her retirement date (PMT = 110,143.57, N = 25, %I = 8, solve for PV).



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An increase in which of the following items is most likely to result in an increase in the width of theconfidence interval for the population mean?

A. Sample sizeB. Reliability factor

C. Degrees of freedom



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Questions 12 Answer

An increase in the reliability factor increases the width of the confidence interval. Both increasing thesample size and increasing the degrees of freedom shrink the confidence interval.



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An analyst gathered the following information about a common stock portfolio:

Arithmetic mean return 14.30%

Geometric mean return 12.70%Variance of returns 380

Portfolio beta 1.35

If the risk-free rate of return is 4.25%, then the coefficient of variation and the Sharpe ratio, respectively, forthe portfolio are closest to:

Coefficient of variation Sharpe ratio

A. 1.36 0.52

B. 1.36 7.44

C. 1.53 0.52



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Questions 13 Answer

Coefficient of variation= standard deviation / arithmetic mean return= 3800.5 / 14.3 = 19.49 / 14.3 = 1.36

Sharpe ratio= (mean return - risk free rate) / standard deviation of returns = (14.3 - 4.25) / 19.49 = 0.52



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An analyst determined that the sample mean and variance for a normal distribution are 42 and 9,respectively. The 99% confidence interval for this random variable is closest:

A. 18.8 to 65.2.B. 34.3 to 49.7.

C. 39.0 to 45.0



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Questions 14 Answer

The 99% confidence interval for a normally distributed random variable is equal to the sample mean 2.58 x sample standard deviation. In this case, the 99% confidence interval = 42 (2.58 x 90.5) = 42

(2.58 x 3) = 42 7.74 34.3 to 49.7.



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Jorge MacDonald is shopping for a home. His budget will support a monthly payment of $1,300 on a30-year mortgage with an annual interest rate of 7.2%. If MacDonald puts a 10% down payment on the

home, the most he can pay for his new home is closest to:A. $191,518.

B. $210,840.

C. $212,800



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Questions 15 Answer

MacDonalds budget will support a monthly payment of $1,300. Given a 30-year mortgage at 7.2%, theloan amount will be $191,517.76 (N = 360, %I = 0.6, PMT = 1,300, solve for PV). If MacDonald makes

a 10% down payment, then the most he can pay for his new home = $191,517.76 / (1 - 0.10) =$212,797.51 $212,800.



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An analyst gathered the price-earnings ratios (P/E) for the firms in the S&P 500 and then ranked thefirms from highest to lowest P/E. She then assigned the number 1 to the group with the lowest P/E

ratios, the number 2 to the group with the second lowest P/E ratios, and so on. The measurementscale used by the analyst is best described as:

A. Ratio.

B. Ordinal.

C. Interval



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Questions 16 Answer

The analyst is using an ordinal scale which involves sorting data into categories based on somecharacteristic, such as the firms P/E ratios.



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The manager of a pension fund determined that during the past five years 85% of the stocks in theportfolio have paid a dividend and 40% of the stocks have announced a stock split. If 95% of the

stocks have paid a dividend and/or announced a stock split, the joint probability of a stock paying adividend and announcing a stock split is closest to:

A. 30%.

B. 45%.

C. 55%.



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Questions 17 Answer

The probability that at least one of two events will occur is the sum of the probabilities of the separateevents less the joint probability of the two events.

P(A or B) = P(A) + P(B) - P(AB)95% = 85% + 40% - P(AB);

therefore P(AB) = 30%



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An analyst determined that approximately 99 percent of the observations of daily sales for a companywere within the interval from $230,000 to $480,000 and that daily sales for the company were normally

distributed. The mean daily sales and standard deviation of daily sales, respectively, for the companywere closest to:

Mean daily sales Standard deviation of daily sales

A. $351,450 $41,667

B. $351,450 $83,333

C. $355,000 $41,667



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Questions 18 Answer

construct and interpret a confidence interval for a normally distributed random variable, and determinethe probability that a normally distributed random variable lies inside a given confidence interval

Given that sales are normally distributed, the mean is centered in the interval.Mean = ($230,000 + 480,000) / 2 = $355,000

An interval including 99% of the observations extends three standard deviations either side of themean. The standard deviation of daily sales = ($355,000 - 230,000) / 3 = $41,667



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An analyst gathered the following information about a stock index.

mean net income for all companies in the index $2.4 mn

standard deviation of net income for all companies in the index $3.2 mnif the analyst takes a sample of 36 companies from the index, the standard error of the sample mean iscloset to:

A. $66,667

B. $88,889

C. $533,333



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Questions 19 Answer

Standard error of the sample mean= 3,200,000/360.5= $533,333



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Questions 20 Economics

The Laffer curve depicts a relationship between which of the following sets of two economic variablesand its proponents belong to which group of economists?

Two economic variables proponents belong toA. Tax rate and tax revenues Monetarists

B. Tax rate and tax revenues Supply-siders

C. Inflation and unemployment Monetarists



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Questions 20 Answer

The relationship between the tax rate and the amount of tax revenue collected is called the Laffercurve, named after Arthur B. Laffer, a supply-side economist and a member of President Reaganseconomic policy advisory board. They argued that tax cuts would increase tax revenues and decreasethe budget deficit.



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In response to the influx of tourists, the demand for guest rooms in Sun-n-Sand, a resort hotel on asouth pacific island, went up from 100 to 150 rooms. As a result, Sun-n-Sand management hasdecided to increase the tariff from $150 to $200 a night per room. The elasticity of supply of rooms inSun-n-Surf is closest to:

A. 0.72.

B. 1.40.

C. 1.50.



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Questions 21 Answer

The elasticity of supply equals the percent change in quantity relative to the average quantity dividedby the percent change in demand relative to the average demand:

The average quantity = (100 + 150) / 2 = 125, the % change in quantity = 50 / 125 = 40;The average price = (150 + 200) / 2 = 175, the % change in price = 50 / 175 = 28.6

Elasticity of supply = 40 / 28.6 = 1.40



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The most accurate description of the effect of a price decrease on total revenue for goods that have anelastic and inelastic demand, respectively, are:

Elastic demand Inelastic demandA. Total revenue declines Total revenue increases

B. Total revenue increases Total revenue declines

C. Total revenue increases Total revenue increases



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Questions 22 Answer

When demand is elastic, a decrease in price by 1% increases the quantity sold by more than 1% and itresults in an increase in total revenue. But when demand is inelastic, a decrease in price by 1%increases the quantity sold by less than 1% and it results in a decrease in total revenue.



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Key factors that influence the levels of structural and frictional unemployment in an economy,respectively, are:

Structural unemployment Frictional unemploymentA. Changes in technology Changes in technology

B. Changes in technology Unemployment compensation

C. Unemployment compensation Changes in technology



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Questions 23 Answer

Structural unemployment refers to the unemployment due to changes in technology, changes in skillsneeded to perform jobs or changes in the location of jobs. Frictional unemployment, on the other hand,is influenced by unemployment compensation.



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According to the feedback rule with productivity shocks, in order to stabilize the price level the mostlikely action by the Fed and the resulting effect on real GDP, respectively, are:

Feds action Effect on real GDPA. Fed decreases the quantity of money The real GDP declines

B. Fed decreases the quantity of money The real GDP remains constant

C. Fed keeps the quantity of money constant The real GDP declines



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Questions 24 Answer

According to the feedback rule, when the price level rises the Fed decreases the quantity of money inorder to reduce aggregate demand. As a result, the price level as well as the real GDP would remainconstant



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In regulating a natural monopoly, the pricing rule most commonly adopted by a regulator, and its effecton the firm's profit, respectively, are:

Pricing rule Effect on firms profitA. Average cost pricing The firm earns normal profit

B. Average cost pricing The firm incurs economic loss

C. Marginal cost pricing The firm earns normal profit



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Questions 25 Answer

The marginal cost pricing rule is efficient but it leaves the natural monopoly incurring an economic loss.Therefore, regulators almost never impose marginal cost pricing rule. Instead, they adopt the averagecost pricing rule, which allows the firm to cover its costs and earn a normal profit.



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An expansionary fiscal policy is most likely to include a(n):

A. Decrease in both interest rates and tax rates

B. Increase in government expenditure and decrease in tax ratesC. Increase in both government expenditures and central banks open market purchase



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Questions 26 Answer

An expansionary fiscal policy means the government increases its purchase of goods and services and/ or cut taxes to increase the aggregate demand



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In a perfectly competitive industries, what is the most likely long run effect of a permanent decrease indemand?

A. Price decrease

B. Firms incur economic losses

C. The number of firms decreases



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Questions 27 Answer

In perfectly competitive industries in the long run firms will leave the industry due to economic losses.As firms leave the industry supply decreases thus increasing prices back to the equilibrium price whereeconomic profit is zero.



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Questions 28 Derivatives

The effects on the price of a call option from an increase in volatility and an increase in interest ratesare:

Increase in volatility Increase in interest ratesA. Decrease Increase

B. Increase Increase

C. Increase Decrease



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Questions 28 Answer

When volatility increases, the price of options increase. When interest rates increase, call option pricesincrease.



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An investor purchases a stock at $60 and at the same time, sells a 3-month call on the stock. Theshort call has a strike price of $65 and a premium of $3.60. The risk-free rate is 4%. The breakevenunderlying stock price at expiration is closest to:

A. $55.85.

B. $56.40.

C. $60.80.



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Questions 29 Answer

A covered call breakeven price equals the price paid for the stock less the premium received for thecall. Breakeven = (S - c) = (60 - 3.60) = $56.40



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A company is long an interest rate swap with a current market value of $125,000. the company wantsto terminate this swap before the expiration date. From a credit perspective, which of these is the leastattractive ways to terminate the swap?

A. Sell the swap to third party

B. Short an offsetting swap to a third party

C. Agree to terminate the swap and receive its market value from the counterparty



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Questions 30 Answer

Both the initial and offsetting swap remain in effect, exposing the company to potential default risk.



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Which of these is best classified as a forward market derivative?

A. A swap agreement

B. A convertible bondC. An asset backed security



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Questions 31 Answer

A swap agreement is equivalent to a series of forward agreements that are described as forwardcommitment derivatives


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