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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 (Remember, 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] (Remember, in the
real exam you dont get to grade your own test!)
11. If you have any queries on any of the questions or answers
please do contact Graham on
[email protected].
12. Your score does not matter; its what you find out along the
way that counts.
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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 members 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. Members and Candidates have a duty of loyalty to their
clients and must act with reasonable
care and exercise prudent judgment.
B. Members and Candidates must act for the benefit of their
clients and place their clients
interests before their employers or their own interests.
C. Members and Candidates must promote the integrity of and
uphold the rules governing
capital markets
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5. Gillian Greens 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 Kirins most recent quarterly accounts;
the discrepancy indicates
that Kirin is trying to hide significant losses for the quarter.
Which of the following is
Gillians 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
Xanders 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
members. Using complex
computerbased 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 terms 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.
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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 accounting 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 verify compliance
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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 contact clients
directly, contacting 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
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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
portfolios investment return
characteristics are known.
B. Portfolios should be added to composites as soon as the
clients 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 firms own
recommendation.
C. Process the order having explained the recent change in
recommendation.
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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 joint book-runner
on a rights issue being offered by NWK. Marys 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 members and beneficiaries of the Ealing Media
Occupational Pension Scheme
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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
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23. Which of the following portfolios maximizes Roys Safety
First criterion, if your
threshold return is todays 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 Students 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
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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. To test whether two populations have the same variance,
which test is used, and what
shape is its distribution?
Test Shape of Distribution
A F Test Symmetrical B F Test Asymmetrical C Chi Squared
Asymmetrical
30. 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
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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 Market Shares (%)
Orange 15
T Mobile 20
O2 25
Vodafone 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
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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 two-
product basket
Price (Base year)
Quantity consumed (Base year)
Price (Current)
Quantity consumed (Current)
Pizza 5 20 7.5 15
Pasta 1 50 1.25 60
A 125
B 138.89
C 141.67
38. How many and which of the following biases are most likely
to lead reported CPI 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
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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
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The following 34 questions relate to Financial Reporting
Analysis and Corporate Finance
45. At the end of an accounting 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 accounting 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 accounting
policies?
A. Footnotes
B. FASB website
C. Management Discussion and Analysis
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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.
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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
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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?
Pre-tax Operating Cash Flow Tax Expense A Same Lower B Same
Higher C Higher Same
59. In pension accounting 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
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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 ELMs 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 accounted
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
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66. You have gathered the following data from the footnote
disclosures of Willoughby
Industries.
2014 2013 Inventory $130,000 $120,000 LIFO Reserve $38,000
$35,000 Tax Rate 20% 20% Cost of Goods Sold $1,365,000 $1,235,000
Operating Income $226,000 $232,000 Net Income $53,000 $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 accounts receivable
C. The issue of zero-coupon bonds
68. Tom Logan, an analyst, gathered the following information
about a firm (Millions)
2013 2014 Cost of Fixed Asset Investments 5.6 5.6
Accumulated Depreciation Expense 2.4 3.2
At the end of 2014 the best estimate of the firms average age
and depreciable life of its
assets is:
Average Age Depreciable Life A. 1.75 years 7 Years B. 3.33 years
6 years C. 4 years 7 years
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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
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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
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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:
Shares Bonds
Number in issue 2,000,000 50,000 Nominal value $1 $1000 Issue
price $10 $1010 Market price $11 $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
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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 re-
price 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
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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
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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
firms 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 Porters 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 Bid Size Limit Price Offer Size Seller
Ken 450 19.66 Jim 500 19.68
Mike 300 19.71 19.72 250 Rita 19.73 150 Sue 19.84 400 Bob 19.99
800 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
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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% ECMs justified
P/E multiple using the
DDM and your trading decision would be, assuming you are
permitted to sell ECM
stock short?
Justified P/E Trading Decision A 4.55 Sell B 6.14 Sell C 6.14
Buy
88. Price to book value is the most appropriate valuation
measure for which of the following
companies?
2013 Net Income (m) 2014 Net Income Advertising Agency 12.8 99.3
Large Media/Entertainment Group (no longer going concern)
--23.2
Ceased trading;
Global Logistics firm
14.2
14.4
A. Advertising agency
B. Media/Entertainment Group
C. Global Logistics
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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 500,000
Tangible Shareholder's equity at 31 Dec 2013 $60 million
Intangible Shareholders equity $75 million
Preferred stock at 31 Dec 2013 15 million
Share buy backs during 2013 200,000
Rights issue during 2013 100,000
Share price at 31 Dec 2013 $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 Spot Rate
6 month 3.2% 12 month 3.4% 18month 3.6% 24 month 3.8% 30 month
4.0% 36 month 4.2%
A 2.4%
B 4.8%
C 6.2%
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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 terms
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
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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.
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100 Which of the following would be an end user 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 Nigerias 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 user
B. X and z end user, y dealer
C. X end user, 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 its collateralised
C. Higher, because its not collateralised
103. Moodys 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
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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
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109. Given the following term structure the price of a 2 year
zero coupon bond is closest to:
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%
Maturity Stated Spot Rate
(%) 6 months 4 12 months 5 18 months 6 24 months 7 30 months 8
36 months 9
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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
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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 1 2
Expected Return 12% 15% Standard deviation 16% 19% Weight 30%
70% Covariance 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%