CFA-LEVEL-1 Online Practice Questions and Answers

Correct Answer: D

The significance level equals the probability of making a Type I error, which is the error of rejecting the null when it is, in fact, true. In this case, this has been given to be equal to 13%.

Correct Answer: D

The portfolio weighted-average return is equal to the sum (as i goes from 1 to n) of w_i * X_i, where w_i is the percentage weight in the portfolio of the ith asset, and X_i is the investment return of the ith asset. Here, we get a weighted mean of 1/3 * 0.05 + 1/3 * 0.15 + 1/3 * -0.02 = 6.00%. Note that because of the equal weighting, this is the same as the arithmetic return: (5% + 15% - 2%) / 3 = 18% / 3 = 6%.

Correct Answer: B

The z-value of a selected observation, X, from a normal distribution with mean M and standard deviation S equals z = (X-M)/S. in the present case, the z-value of X = 0 equals -4.1/2.3 = -1.78. Then, the probability that a number Y is negative is the same as the probability of a z-value less than -1.78. Using the Normal probability tables to get P(z < -1.78) is tricky because the table given in the assigned text is only for positive values. To calculate the probability, use the fact that the standard normal distribution is symmetrical about zero. Hence, P(z < -1.78) = P(z > + 1.78) = 1.0 - 0.9625 = 0.0375.

Correct Answer: C

If the rate of inflation in a nation is greater than that of its trading partners prices are rising faster at home than abroad. As a result, foreign consumers demand less of the nation's exports because they are now relatively more expensive. Falling demand for exports causes the demand for the nation's currency to decline and thus the currency depreciates.

Correct Answer: B

All accounting information is subject to two quantitative constraints: materiality and cost/benefit. The constraint of benefit/cost states that the benefits of information must exceed the cost of obtaining it.

Correct Answer: A

Using CAPM, the cost of equity equals 5.5% + 1.3*(16% - 5.5%) = 19.15%. Since the debt interest is tax deductible, the after-tax cost of debt equals 7%*(1-0.45) = 3.85%. Now, the D/E ratio = 0.8. Hence, (D+E)/ E = 1.8, giving E/(D+E) = 0.556. Thus, equity forms 55.6% of the capital while debt forms 44.4%. The WACC is then equal to 0.556*19.15% + 0.444*3.85% = 12.35%.

Correct Answer: C

Open-end funds (also known as mutual funds) continue to sell and repurchase shares at their NAVs after their initial public offerings. Some funds (load funds) charge a sales fee for share sales that is typically 7.5 to 8% of the NAV. Load funds generally do not charge a redemption fee, but some noload funds do charge a small one of about half a percent of NAV.

Correct Answer: A

Efficient market studies have indicated that few investors outperform the aggregate market averages. This makes Managed investment companies a good alternative to direct investment because most of these companies offer a wide range of investment possibilities with a range of risk and return characteristics.

Correct Answer: C

None of these answers is correct.

To determine the value of a common stock experiencing temporary supernormal growth, use the following equation:

{V = {[d0 * (1 + gs)^1] / k} + {[d1 * (1 + gs)^2} + ... {dn * (1 + gs)^n} + {[dn * (1 + gs)^n * (1 + gn] / (k - g)}/ (1

+ k)^n}}

Where: V = the value of common stock at t0, d0 = the dividend at t0, d1 = the dividend at t1, dn = the

dividend at tn, gs = the supernormal rate of growth, gn = the normal rate of growth, n = the time period "n",

and k = the required rate of return.

In this example, the supernormal growth period is followed by a transitional growth period of one year,

during which the growth rate of this stock is expected to grow at 15% annually. This period will follow the

two-year supernormal growth period, and would be denoted as "g subset t" if we were to rewrite the basic

equation listed above. The calculation of the value of this common stock is illustrated as follows:

{V = {[$1.80 * (1.20)^1] / (1.17)} + {[$1.80 * (1.20)^2] / (1.17)^2} + {[$1.80 * (1.20)^2 * (1.15)^1] / (1.17)^3} +

{{[$1.80 * (1.20)^2 * (1.15)^1 * (1.12)^1]/ (0.17 - 0.12)}/ (1.17)^3}

Which can be deduced to the following:

{V = [$1.846154 + $1.893491 + $1.861124 + $24.814983] = $30.415752}

Correct Answer: D

According to the Dow Theory, there should be a general upward price movement during a bull market, perhaps punctuated by occasional low-volume sell offs because of profit taking. Every recovery from a sell off should reach a higher peak than that resulting from the previous recovery.