CFA-LEVEL-1 Online Practice Questions and Answers

Correct Answer: E

This question relates to the compliance procedures for Standard IV (B.4), one of which states that firms should establish disciplinary procedures to enforce the standard. If a manager has purchased a security in violation of trading policy, disgorgement is recommended. Managers should disgorge all profits and assume any losses from the trade.

Correct Answer: D

While every member must always comply with the Code, Standard III (A) stipulates that ensuring compliance with the Code in an organization ultimately is the responsibility of the senior most AIMR member of the firm reporting to a non- member. He must make sure that the firm environment is sympathetic to compliance with the Code.

Correct Answer: A

Standard I requires that suspected violation of laws be reported to appropriate supervisory people in the firm. It is also advisable to consult the legal department and dissociate oneself from the illegal activity. Sunil has to dissociate himself from the underwriting process involving Raindrop but he does not have to sever connections with his employer, Glamorgan.

Correct Answer: C

There are 3 + 4 + 2 = 9 workers. The total wages paid equal 3*5.3 + 4*4.9 + 2*8.1 = $51.7. The average pay equals 51.7/9 = $5.74

Correct Answer: C

The combination, or binomial formula, gives the number of ways that k objects can be chosen from n items, without regard to the order of choosing. The formula is n_C_k = (n choose k) = n! / [k! *(n-k)!]. In this case, we have (10 choose 3) = 10! / [3! * 7!] = (10

* 9 * 8) / (6) = 120. In the second case, where the order chosen does matter, we need the general permutation formula, which gives the number of ways that k objects can be chosen from n items, with regard to order. The formula is n_P_k = n! / (n- k)!. Here, it is 10! / (10-3)! = 720. For permutations, we don't consider choosing analysts 3, 7, and 6 the same as choosing analysts 7, 3, and 6, so there are more combinations than under the combination formula.

Correct Answer: D

The population variance is equal to the sum of the squared differences between each population member and the population mean, divided by the number of items in the population. There is, however, an equivalent alternate formula that is more often used for large amounts of calculation. It is equal to the average squared observation less the squared mean. In this case, we have the average squared observation will be 0.27 / 30 = 0.009, less the squared mean of 8%. We have 0.009 - 0.0064 = 0.0026 = 26%%.

Correct Answer: D

Both are concepts which are based on the position of the observations when ordered (median) and the number of most frequent occurrences (mode). They are measures which are not affected by extreme values.

Correct Answer: E

The classic non-activist monetary policy example is to increase the money supply by a particular level every year. Activist or discretionary monetary policy involves changing the supply of money to counteract negative developments in the economy.

Correct Answer: B

The ending inventory under LIFO is priced at the earliest, and thus the lowest prices (in a period of rising prices) than any of the other methods.

Correct Answer: C

Correct Answer: E

Sunk cost is not a relevant cash flow.

Correct Answer: B

When markets are volatile, global diversification is of limited value. Studies show that correlations between

markets increase as market volatility increases, which limits the benefits of diversification. In particular,

studies show that correlations increase when markets are falling.

The other statements are true. Although foreign exchange risk is not considered a factor that impacts

correlations, it is a significant barrier to international investing.

Correct Answer: C

Remember though, that many properties sell for prices significantly above or below their estimated market values.

Correct Answer: B

The confidence index is equal to the average yield on 10 top-grade corporate bonds divided by the yield on the Dow Jones average of 40 bonds, multiplied by 100. Since the average yield on high-grade bonds will always be higher than the average yield on a large cross section of bonds, the index will always have a value under 100.

Correct Answer: C

The risk-free rate as measured by the rate on U.S. Treasury securities often referred to as the "nominal," or "quoted," rate. This rate is comprised of two components, the real "inflation-free" rate of interest, and an inflation premium that is equal to the anticipated rate of inflation. The equation for the calculation of the nominal interest rate is as follows:

Risk-free rate of return = k* + IP

where: k* = the real inflation-free rate of return and IP = the inflation premium

An increase in anticipated inflation will cause a change in the nominal risk-free rate equal to the change in expected inflation. For instance, if the inflation premium increases by 100 basis points, then the nominal risk-free interest rate will increase by 100 basis points. Further, if the inflation-free rate of interest experiences a change, that change will be identically mirrored in the nominal risk-free interest rate. For example, suppose the inflation-free rate of interest decreases by 50 basis points. In this situation, the result would be a 50 basis point reduction in the nominal risk-free rate of interest.

When either the real "inflation-free" interest rate or the expected inflation rate are significantly large, the calculation of the nominal risk-free rate differs from the equation used when these factors are significantly small. Specifically, the calculation of the nominal risk-free rate of interest when theinflation-free rate of interest and/or the inflation premium are significantly high, the calculation of the nominal risk-free rate is as follows:

Nominal RFR = (1 + Real RFR)(1 + E(I)) - 1

Where: Real RFR = the real inflation-free rate of interest and E(I) = the anticipated inflation rate.