Question #1 of 180 Question ID: 1614732

A market can be characterized as efficient if assets':

A) book values equal their market values.

B) intrinsic values equal their book values.
C) market values equal their intrinsic values.

Question #2 of 180 Question ID: 1614793

A direct investment in a cryptocurrency is said to occur when:

A) a transaction is recorded on the blockchain.

B) the purchase of a cryptocurrency stock is settled.
C) an investor takes a position in a cryptocurrency futures contract.

Question #3 of 180 Question ID: 1614675

Long-term shifts in population from one country to a neighboring country are best
described as which type of geopolitical risk?

A) Event risk.
B) Thematic risk.
C) Exogenous risk.

Question #4 of 180 Question ID: 1614699

A website produces content that it allows the public to view for free. Users may post
comments on the site's content if they register with the website and agree to permit it
to show them targeted advertisements. The website's business model is best
described as being based on:
A) hidden revenue.
B) crowdsourcing.
C) network effects.

Question #5 of 180 Question ID: 1614805

A professional organization most appropriately enforces upon its members:

A) legal standards only.

B) ethical standards only.
C) both legal and ethical standards.

Question #6 of 180 Question ID: 1614747

Assuming annual compounding, the price of a zero-coupon bond with a face value of
$1,000, maturing 10 years from today, with a yield to maturity of –1.5% is closest to:

A) $860.
B) $1,015.
C) $1,160.

Question #7 of 180 Question ID: 1614809

Thomas Baker recently passed the Level III CFA examination. Baker is reviewing a draft
of the firm's marketing material to be distributed after he receives his CFA charter.
One passage reads, "Baker passed all three Levels of the CFA exam on his first
attempts in three consecutive years." Is this statement in compliance with CFA
Institute Standards?

A) Yes, as long as it is a statement of fact.

B) No, because it implies that Baker has superior ability.
No, because Members or Candidates who passed the exams on their first attempts
C)
may not differentiate themselves from those who did not.
Question #8 of 180 Question ID: 1614661

If an investor uses a threshold return of 0% in calculating the safety-first ratio, which

combination of expected returns and standard deviations is most desirable?

A) Expected return of 7% and standard deviation of 9%.

B) Expected return of 6% and standard deviation of 8%.
C) Expected return of 4% and standard deviation of 6%.

Question #9 of 180 Question ID: 1614687

An owner of a business is most likely to have limited liability if he is a:

A) shareholder.
B) sole proprietor.
C) general partner.

Question #10 of 180 Question ID: 1614660

An analyst determines that there is a 60% probability that a stock price will end the
year at $12 per share. If there is an equivalent probability that the stock will end the
year at either $10 or $16, the expected value of the stock price is:

A) $11.20.
B) $12.40.
C) $13.60.

Question #11 of 180 Question ID: 1614810

Telling potential investors that a short-term U.S. Treasury fund contains "guaranteed"
securities:

A) does not violate any Standard.

B) violates the Standards by misrepresenting the securities in the fund.
violates the Standards by failing to consider the suitability of the fund for potential
C)
investors.

Question #12 of 180 Question ID: 1614710

When a company grants stock options to employees, the company is required to:

A) value the options using the Black-Scholes-Merton model.

B) disclose how the options affect the income statement and balance sheet.
C) recognize the fair value of the options as an expense in the period of the grant date.

Question #13 of 180 Question ID: 1614811

Riley and Smith, a broker-dealer, is bringing to market a secondary offering for All Pro
Company. One of the reasons All Pro selected the firm to lead the offering is because
Riley and Smith has been a market maker for All Pro's stock for the past five years. The
firm is in possession of material nonpublic information relevant to All Pro's offering.
To be in compliance with the Code and Standards, Riley and Smith:

A) may not serve as underwriter for the same stock in which it acts as a market maker.
should continue to serve as market maker but take only the contra side of
B)
unsolicited customer trades.
should abstain from making a market in All Pro stock during the offering period but
C)
may resume market making activities after the offering.

Question #14 of 180 Question ID: 1614672

Tax policy that is designed to minimize its interference with market forces is said to
exhibit:

A) fairness.
B) efficiency.
C) sufficiency.
Question #15 of 180 Question ID: 1614715

An analyst who believes a company's financial reporting is aggressive would most

likely point out:

A) low salvage value estimates for fixed assets.

B) large valuation allowances for deferred tax assets.
C) longer useful lives of equipment than those of peer companies.

Question #16 of 180 Question ID: 1614806

Which of the following statements is most accurate regarding the GIPS requirement
for definition of the firm?

A) The firm must be the distinct business entity held out to clients.
If a firm has offices in different geographical locations, the firm definition may
B)
include just the primary location where all the investment decisions are made.
The firm definition may include the corporation or a subsidiary of the corporation,
C)
but the firm cannot be defined as simply a “division” of the corporation.

Question #17 of 180 Question ID: 1614689

Which of the following is most accurate regarding information asymmetry in

corporations?

A) Management has more information than shareholders.

B) Shareholders have more information than debtholders.
C) The board of directors has more information than management.

Question #18 of 180 Question ID: 1614663

Which of the following statements is most accurate regarding parametric and
nonparametric tests?

A) A z-test is an example of a parametric test, while a t-test is nonparametric.

B) Both kinds of tests assume that the underlying data are normally distributed.
Data that are ranks rather than values are best evaluated using a nonparametric
C)
test.

Question #19 of 180 Question ID: 1614673

A central bank's long-term policy goal for the exchange rate of its domestic currency is
most likely to be to pursue:

A) stability.
B) appreciation.
C) depreciation.

Question #20 of 180 Question ID: 1614812

Ray Brown, CFA, gives prospects his firm's marketing materials, not prepared by him,
that indicate he has a graduate degree from State University, when in fact he did
graduate work there but did not receive a degree. Brown informed the marketing
department of this error when he first saw it. Brown has:

A) violated the Standards by misrepresenting his qualifications.

B) not violated the Standards because he has informed his firm of the mistake.
not violated the Standards because he did not prepare the marketing materials or
C)
misrepresent his credentials to his firm.

Question #21 of 180 Question ID: 1614719

An analyst asks a number of her colleagues, who she believes have no emotional
investment in the matter, for their views on a particular company. Which bias is the
analyst most likely trying to mitigate by seeking these opinions?
A) Confirmation bias.
B) Conservatism bias.
C) Illusion of control bias.

Question #22 of 180 Question ID: 1614813

Which of the following statements is most accurate about the Standard concerning
knowledge of the law? Members and candidates are responsible for violations:

A) that are proven by a regulatory authority.

B) of which they are aware or should be aware.
C) in which they knowingly participate or assist.

Question #23 of 180 Question ID: 1614814

Andrew Pollard, CFA, overhears two executives from a multinational oil company
discussing an unexpectedly large earnings increase the company is preparing to
announce the following morning. When Pollard gets home that evening, he places an
order to buy shares in this oil company. Which of the following best describes this
situation?

A) Pollard violated the Standards by acting on material nonpublic information.

There is no violation of CFA Institute Standards since this was simply an overheard
B)
conversation.
Pollard violated CFA Institute Standards by not contacting counsel for advice before
C)
placing the trade.

Question #24 of 180 Question ID: 1614688

Bill Jones holds ten $1,000 par, 6% bonds maturing in 3 years. Kathy Reed holds 200
shares of common stock from the same company. Which of the following statements
is most accurate about their respective investments?

A) Both investors have unlimited upside and limited downside exposure.

B) Jones’s investment has a lower priority of claims than Reed’s investment.
C) Reed’s investment may return more cash overall than Jones’s investment.

Question #25 of 180 Question ID: 1614703

A firm has recently incurred the following costs in relation to two projects.

Project 1: Purchase of a copyright for $1,000 6 months ago, although there is now an
active market valuing this asset at $1,700.

Project 2: Research costs of $4,000 and development costs of $7,000. In addition to

these costs, advertising costs associated with the project were $2,000.

Under U.S. GAAP, these projects will increase intangible assets on the balance sheet
by:

A) $1,000.
B) $8,000.
C) $12,700.

Question #26 of 180 Question ID: 1614690

Which of the following is most likely to improve a company's cash position, other
things equal?

A) Decreasing days’ payables.

B) Decreasing inventory turnover.
C) Decreasing credit terms from 2/60 to 2/45.

Question #27 of 180 Question ID: 1614815

A member provides a client with an investment performance presentation that does

not include detailed information, but reflects the member's reasonable efforts to
present results that are fair, accurate, and complete. Has the member complied with
the Standard related to performance presentation?
A) Yes, the member has met the requirements of the Standard.
No, because the performance presentation must comply with Global Investment
B)
Performance Standards.
No, because “reasonable efforts” do not ensure that the presentation is fair,
C)
accurate, and complete.

Question #28 of 180 Question ID: 1614669

Peaks and troughs in the business cycle are most likely to appear earliest as measured
by the:

A) growth cycle.
B) classical cycle.
C) growth rate cycle.

Question #29 of 180 Question ID: 1614816

Gary Hoskins, CFA, runs a macro strategy hedge fund. The hedge fund has a short
position in July osmium futures. Hoskins attempts to gain control of the available
supply of osmium that can be delivered in July, which will cause holders of long July
futures to make offsetting trades instead of settling by delivery. Has Hoskins violated
the Standard concerning market manipulation?

A) Yes.
B) No, because Hoskins is executing an arbitrage trade.
C) No, because Hoskins is not manipulating the price of osmium.

Question #30 of 180 Question ID: 1614693

A project with a conventional cash flow pattern has a net present value of $15,000. If
the discount rate used was 6%, the project's internal rate of return is:

A) equal to 6%.
B) less than 6%.
C) greater than 6%.

Question #31 of 180 Question ID: 1614807

Which of the following statements best describes how GIPS requires portfolios to be
grouped into composites?

A discretionary portfolio should be included in all composites that are consistent

A)
with the assets held.
All discretionary portfolios must be included in a composite, but only if they are still
B)
managed by the firm.
Each composite must include all discretionary portfolios that the firm has managed
C)
according to a particular strategy or style.

Question #32 of 180 Question ID: 1614700

Which of the following is the most likely reason why an analyst needs to monitor
developments in financial reporting standards?

A) Company managements may choose aggressive or conservative accounting policies.

Financial statements might not always present a company’s economic reality
B)
accurately.
Changes in accounting standards may require a company to restate its financial
C)
statements.

Question #33 of 180 Question ID: 1614671

A national government that wants to increase economic growth through fiscal policy is
most likely to:

A) decrease the discount rate.

B) purchase government securities.
C) increase spending on infrastructure.
Question #34 of 180 Question ID: 1614712

The following data appear on the balance sheet of a U.S. GAAP reporting company:

Gross deferred tax asset at the beginning of the year = $10,500

Gross deferred tax asset at the end of the year = $11,250

Valuation allowance at the beginning of the year = $2,700

Valuation allowance at the end of the year = $3,900

Based only on this information, the company's earnings in future periods are
expected to:

A) increase.
B) decrease.
C) remain relatively stable.

Question #35 of 180 Question ID: 1614691

Drags on liquidity are most likely to include:

A) inventory obsolescence.
B) paying vendors too soon.
C) suppliers requiring payment sooner.

Question #36 of 180 Question ID: 1614713

Other things equal, which of the following conditions would place a company highest
on a spectrum of financial reporting quality?

A) Reported earnings that are not sustainable.

B) Efforts by management to keep net income steady over time.
Financial statements that reflect the company’s economic activities accurately but
C)
are not in compliance with accounting principles.
Question #37 of 180 Question ID: 1614705

A company purchases an asset in the first quarter and decides to capitalize the asset.
Compared to expensing the asset cost, capitalizing the asset cost will result in higher
cash flows in the first quarter from:

A) investing.
B) financing.
C) operations.

Question #38 of 180 Question ID: 1614817

Moe Girard, CFA, works in a large group that decides on recommendations by

consensus. Girard does not always agree with the group consensus, but he is
confident in the group's analytical ability. To comply with the Code and Standards
when the group issues a recommendation with which he disagrees, Girard:

A) does not need to take any action.

B) must request that his name be removed from the group’s report.
C) should include his independent opinion as an appendix to the group’s report.

Question #39 of 180 Question ID: 1614818

Jimmy Deininger, CFA, manages several client portfolios. One of his clients offers him
use of a cabin in a vacation spot because the client's investment results under
Deininger's management have exceeded the client's goals. Deininger discloses the gift
to his employer. With reference to the Standards of Practice, Deininger:

A) has complied with the Standards and may accept the gift.
is not permitted to accept the gift because he does not have permission from his
B)
employer.
has appropriately disclosed the gift to his supervisor, but must also disclose it to his
C)
other clients.
Question #40 of 180 Question ID: 1614707

In periods of rising prices and stable or increasing inventory quantities, compared

with companies that use LIFO inventory accounting, companies that use the FIFO
method will have:

A) higher COGS and lower taxes.

B) higher net income and higher taxes.
C) lower inventory balances and lower working capital.

Question #41 of 180 Question ID: 1614695

Martin Zwingle is making a capital allocation decision with regard to a new project.
The initial expense of the project would cause the company's earnings per share for
the current year to come in below analysts' expectations. If Zwingle decides against
the project, his firm will allocate his division a smaller capital budget next year. Which
of these factors are appropriate for Zwingle to include in the capital allocation
decision?

A) Both of these factors are appropriate.

B) Neither of these factors is appropriate.
C) Only one of these factors is appropriate.

Question #42 of 180 Question ID: 1614667

A manufacturing plant exhibits diseconomies of scale if long-run average cost (LRAC)

is:

decreasing as output increases, and the plant is at its minimum efficient scale if
A)
LRAC is at its lowest level.
decreasing as output increases, and the plant is at its minimum efficient scale if
B)
LRAC is decreasing over the entire range of output.
increasing as output increases, and the plant is at its minimum efficient scale if LRAC
C)
is at its lowest level.
Question #43 of 180 Question ID: 1614676

Placing a tariff on imports of a good is most likely to decrease:

A) producer surplus for domestic producers of the good.

B) quantity of the good supplied by domestic producers.
C) quantity of the good demanded in the domestic market.

Question #44 of 180 Question ID: 1614666

The standard error of estimate in a simple linear regression is equal to:

A) the square root of the mean squared error.

B) the sum of squares regression divided by the sum of squares total.
C) the sum of squared errors divided by the degrees of freedom for the error term.

Question #45 of 180 Question ID: 1614670

Data for a manufacturing industry indicate that inventories of work in progress are
increasing faster than sales. This is most likely to indicate that:

A) the business cycle is at a peak.

B) inventory is becoming obsolete.
C) firms expect demand to increase.

Question #46 of 180 Question ID: 1614678

Consider two currencies, the VKN and the PKR. The PKR is trading at an annual
premium of 2.3% relative to the VKN in the forward market. The 1-year risk-free PKR
rate is 3.0%. If no arbitrage opportunities are available, the current 1-year risk-free
VKN interest rate is closest to:

A) 0.7%.
B) 2.3%.
C) 5.3%.

Question #47 of 180 Question ID: 1614656

Frank Jones is considering three separate investments. Investment 1 pays a stated

annual interest rate of 6.1%, compounded annually. Investment 2 pays a stated
annual interest rate of 6.0%, compounded monthly. Investment 3 pays a stated annual
interest rate of 5.9%, compounded quarterly. Which investment should Smith choose?

A) Investment 1.
B) Investment 2.
C) Investment 3.

Question #48 of 180 Question ID: 1614819

Carlos Mendez, CFA, is beginning an investment advisory relationship with a new

client and plans to formulate an investment policy statement (IPS) for the client.
According to the Standard concerning suitability, Mendez is least likely to consider the
client's:

A) regulatory and legal circumstances.

B) conflicts of interest.
C) performance measurement benchmarks.

Question #49 of 180 Question ID: 1614668

Wilmer Jones owns several restaurants in different cities. His restaurants compete on
quality of food and service, price, and marketing. Competitors can enter and exit his
markets, and there are usually several competitors in each market. His market
structure can best be characterized as:

A) perfect competition.
B) monopolistic competition.
C) oligopoly.
Question #50 of 180 Question ID: 1614808

With regard to performance measurement, the Global Investment Performance

Standards for firms:

A) require time-weighted rates of return.

B) require money-weighted rates of return.
C) permit both time-weighted and money-weighted rates of return.

Question #51 of 180 Question ID: 1614820

A portfolio manager of a city's police pension fund owes his duty of loyalty to the:

A) city’s taxpayers.
B) pension trustees.
C) plan beneficiaries.

Question #52 of 180 Question ID: 1614821

Matt O'Neill, CFA, is an advisor for Century Investments, a retail financial services firm.
Century has a firmwide policy that its advisors recommend the firm's own investment
products to clients unless Century does not offer a product suitable for the client's
needs. Can O'Neill follow his firm's policy without violating the Code and Standards?

A) Yes, if O’Neill discloses this policy to his clients.

B) Yes, if his firm’s offerings are competitive with other available products.
C) No, because the policy conflicts with the Standard on loyalty, prudence, and care.

Question #53 of 180 Question ID: 1614694

An appropriate way to address the effectiveness of a company's management in

creating value for shareholders is to compare the company's:
A) net profit margin to its cost of equity.
B) weighted average cost of capital to its return on invested capital.
C) total cost of debt and equity financing to its earnings before interest and taxes.

Question #54 of 180 Question ID: 1614704

An IFRS reporting firm holds equity securities as investments and classifies them for
financial reporting as measured at fair value through profit and loss. Can the firm
reclassify these securities as measured at fair value through other comprehensive
income?

A) Yes.
B) No, because IFRS does not permit this classification for equity securities.
C) No, because the firm did not choose this treatment at the time of purchase.

Question #55 of 180 Question ID: 1614822

Wayne Sergeant, CFA, is an independent investment advisor who works with

individuals. A longtime client asks Sergeant if he can recommend an attorney.
Sergeant refers his client to Jim Chapman, a local attorney who is also a friend of
Sergeant's. Previously, Chapman had agreed to perform some legal work for Sergeant
in exchange for the referral of new clients. Do Sergeant's actions violate CFA Institute
Standards of Professional Conduct?

No, because the client is under no obligation and is still free to select another
A)
attorney.
Yes, because Sergeant is making a recommendation that is not independent and
B)
objective.
Yes, because Sergeant did not disclose the nature of his arrangement with Chapman
C)
to his client.

Question #56 of 180 Question ID: 1614823

Ron Brenner, CFA, manages portfolios for individuals. One of his clients, John Perlman,
offers Brenner several inducements above those provided by his employer to
motivate superior future performance in managing his portfolio. Brenner notifies his
manager via e-mail about the terms of this offer, and his employer grants permission.
According to the Standard on additional compensation arrangements, Brenner:

A) must notify “all parties involved,” which includes his other clients.
B) has taken all the actions required to accept the arrangement.
should decline this arrangement because it could cause partiality in the handling of
C)
other client accounts.

Question #57 of 180 Question ID: 1614674

A central bank's policy rate is considered expansionary if it is less than:

A) the central bank’s target inflation rate.

B) the long-term growth rate of real economic output.
the sum of the long-term growth rate of real economic output and the target
C)
inflation rate.

Question #58 of 180 Question ID: 1614711

Dot Corporation uses accelerated depreciation for tax purposes and straight-line
depreciation for financial reporting. The company has a large cash position which is
invested in tax-free municipal bonds. With regard to Dot's financial statements and tax
reporting:

both the interest income and the depreciation method will necessitate the use of a
A)
valuation allowance account.
the interest income will result in a deferred tax asset and the depreciation method
B)
will result in a deferred tax liability.
the depreciation expense causes a temporary difference between income tax
C)
expense and taxes payable, and the interest income creates a permanent difference.
Question #59 of 180 Question ID: 1614824

Denise Chavez, CFA, is the senior energy analyst for a major brokerage firm. Chavez is
also a social and environmental activist, and is opposed to coal-fired power plants.
She has been arrested twice for trespassing during organized pickets at some of these
power plants. Chavez has recently accepted a volunteer position as Board member of
Greensleeves, a foundation that lobbies governments on environmental issues. The
position will involve significant volunteer hours, including some travel. Are Chavez's
activities consistent with CFA Institute Standards?

Chavez violated the Standards by being arrested, but the volunteer Board position is
A)
not a violation.
The environmental activism is not a violation, but the Standards prohibit Chavez
B)
from accepting the Board position.
The activism and subsequent arrests are not a violation, but Chavez must disclose
C)
the Board position to her employer.

Question #60 of 180 Question ID: 1614825

With respect to a client's confidential information, if a member or candidate believes a

client is engaging in illegal activity, the member should most appropriately:

A) preserve the client’s confidentiality.

B) report the client to the appropriate governmental authorities.
C) seek advice from his firm’s legal counsel or compliance department.

Question #61 of 180 Question ID: 1614718

Bivac Corp. has been experiencing a declining return on equity over the past few
years. Selected financial statement ratios for Bivac appear below:

Prior Year Current Year

Tax Burden 0.60 0.62

Interest Burden 0.80 0.81

EBIT Margin 0.26 0.26

Asset Turnover 1.06 1.06

ROE 0.15 0.14

What is the most likely reason for the decline in Bivac's ROE?

A) Leverage has declined.

B) The tax rate has increased.
C) Net profit margin has declined.

Question #62 of 180 Question ID: 1614697

The capital structure theory that implies an optimal capital structure employing both
debt and equity is:

A) pecking order theory.

B) static trade-off theory.
C) Modigliani and Miller with taxes.

Question #63 of 180 Question ID: 1614826

Jenny Pickler, a Level II CFA Candidate, writes an economic forecast containing several
interest rate projections. Her firm's investment committee reviews Pickler's report and
changes several of the interest rates Pickler had forecast. To comply with CFA Institute
Standards, Pickler:

A) does not need to take any further action.

B) should ask that her name be removed from the report.
 is required to independently review the data supporting the investment committee’s
C)
changes.

Question #64 of 180 Question ID: 1614720

An analyst is forecasting a company's sales and costs. He notes that the company's
product demand is elastic, and that the unit price of its product is expected to
increase by 4% over the forecast period. The analyst should forecast the company's
revenue to:

A) increase.
B) decrease.
C) remain constant.

Question #65 of 180 Question ID: 1614658

An analyst has calculated the arithmetic, harmonic, and geometric mean using the last
10 years of returns on a stock. Which of these means should the analyst most
appropriately use to forecast next year's return on the stock?

A) Harmonic mean.
B) Geometric mean.
C) Arithmetic mean.

Question #66 of 180 Question ID: 1614659

The histogram of returns data for the Accel Equity Fund has a long left tail and is more
peaked than a normal distribution. Based on the histogram, the distribution of returns
for Accel has:

A) positive skewness.
B) negative skewness.
C) negative excess kurtosis.
Question #67 of 180 Question ID: 1614827

Recommended procedures for compliance with the Standard concerning misconduct

suggest that firms in the investment industry should:

periodically test their employees’ knowledge of applicable laws, regulations, and the
A)
firm’s code of ethics.
periodically inform employees of violations that have occurred and the disciplinary
B)
actions that the firm took against the employees involved.
check references of potential employees to verify that they are of good character
C)
and eligible for employment in the investment industry.

Question #68 of 180 Question ID: 1614716

A company understates year-end depreciation. As compared to the properly stated

year-end results, what effect will this understatement have on the company's asset
turnover ratio?

A) No impact.
B) Decrease.
C) Increase.

Question #69 of 180 Question ID: 1614679

A spot exchange rate is 8.6145 and the 1-year forward quotation is +0.25%. The 1-year
forward quotation on a points basis is closest to:

A) 2.
B) 25.
C) 215.

Question #70 of 180 Question ID: 1614702

Thunderbird Company reported net income of $500 million and the company had 100
million common shares outstanding. In addition, Thunderbird had 5 million shares of
convertible preferred and 10 million outstanding warrants during the year. Each
preferred share pays a dividend of $4 per share and is convertible into three common
shares. Each warrant is convertible into one common share at $25 per share. The
company's stock traded at an average $50 per share. Thunderbird's diluted earnings
per share for the year is closest to:

A) $4.00 per share.

B) $4.20 per share.
C) $4.80 per share.

Question #71 of 180 Question ID: 1614665

The regression line in a simple linear regression model minimizes the sum of the
squared differences between:

A) the values of the dependent variable and its mean.

B) the predicted and actual values of the dependent variable.
C) the model’s errors and the standard error of the dependent variable.

Question #72 of 180 Question ID: 1614701

Mullins Company's financial statements include an auditor's report with a qualified

opinion. This most likely implies that the:

auditor is reasonably assured that the financial statements are free of material
A)
errors.
financial statements include exceptions to the applicable accounting standards but
B)
are presented fairly.
financial statements are materially out of compliance with the applicable accounting
C)
standards and are not presented fairly.

Question #73 of 180 Question ID: 1614828

Which of the following statements is most accurate? An analyst who changes
employers and wants to maintain coverage of a stock:

A) may copy supporting records from the prior firm and use them at the new firm.
must re-create the supporting records at the new firm with information from public
B)
sources or from the covered firm.
may maintain his recommendations at the new firm without re-creating the
C)
supporting documentation if those recommendations had a reasonable basis.

Question #74 of 180 Question ID: 1614829

After taking the Level I exam, Willie Winchester posts a comment on a social media
website wondering why the exam had no questions about interest rate risk and
currency risk. Winchester has:

A) violated the Code and Standards by discussing the CFA Program on social media.
violated the Code and Standards by disclosing confidential information about the
B)
exam.
not violated the Code and Standards because he did not disclose specific exam
C)
questions.

Question #75 of 180 Question ID: 1614706

During 20X1, Tusa Company sold machinery with an original cost of $100,000, and
recognized a $15,000 gain from the sale. At the time of the sale, the accumulated
depreciation of the machinery was $80,000. Ignoring taxes, the machinery sale will
produce a:

A) $15,000 inflow from investing activities.

B) $20,000 inflow from operating activities.
C) $35,000 inflow from investing activities.

Question #76 of 180 Question ID: 1614830

With regard to independent practice by Members and Candidates who are employed,
the Code and Standards specify that:

A) undertaking independent practice includes preparations to begin such practice.

written consent must be obtained from both the employer and clients who may be
B)
affected.
members and candidates contemplating independent competitive business must
C) notify their current employer of the types of services to be rendered, duration, and
compensation.

Question #77 of 180 Question ID: 1614708

For the last few years, firms in an expanding industry have found it more difficult to
keep up with consumer demand despite steadily increasing inventory levels. The
Consumer Price Index (CPI) has been at a level of 1050, 1060, and 1087 in the last
three years. Given this situation, a firm in this industry that seeks to report higher net
income would most likely prefer which inventory accounting method?

A) LIFO.
B) FIFO.
C) Average cost.

Question #78 of 180 Question ID: 1614714

Jo Evans analyzes the financial statements of Shubert Company and writes, "Shubert's
earnings, while sustainable, provide an inadequate return to shareholders." Evans has
expressed a concern with Shubert's:

A) quality of reported results only.

B) financial reporting quality only.
C) quality of reported results and financial reporting quality.

Question #79 of 180 Question ID: 1614831

Isaac Jones, CFA, is a portfolio manager for a major brokerage firm. Jones wishes to
buy Maxima common stock for some of his clients' accounts. Jones also wishes to
purchase Maxima for his personal account. In accordance with CFA Institute
Standards, Jones may purchase Maxima for his personal account:

A) only after completing the transactions for his clients.

along with the purchases for his clients, as long as this is disclosed in advance to his
B)
clients and employer.
at any time, as long as the execution price is not more favorable than the execution
C)
price received by the clients.

Question #80 of 180 Question ID: 1614662

A method of estimating the standard error of the sample mean that involves
calculating the means of repeated samples, each with one observation omitted from
the initial samples, is most appropriately termed the:

A) jackknife method.
B) bootstrap method.
C) sample reduction method.

Question #81 of 180 Question ID: 1614832

With respect to the responsibilities of supervisors, the Code and Standards state that
those with supervisory responsibility:

A) may not delegate supervisory responsibility.

B) are in violation if an employee under their supervision commits securities fraud.
must institute procedures to prevent and detect violations of rules and regulations
C)
by those subject to their supervision.

Question #82 of 180 Question ID: 1614696

A firm has one actively traded bond issue outstanding, with a 6% coupon and a yield
to maturity of 5%. When estimating the firm's weighted average cost of capital (WACC),
the appropriate after-tax cost of debt capital is:

A) between 5% and 6%.

B) less than 5%.
C) equal to 6%.

Question #83 of 180 Question ID: 1614709

A decrease in accumulated depreciation is most likely to result from:

A) selling or disposing of a long-lived asset.

B) increasing the salvage value of a long-lived asset.
C) decreasing the estimated useful life of a long-lived asset.

Question #84 of 180 Question ID: 1614833

The Standard concerning suitability recommends that the objectives and constraints
of an investment policy statement should be reviewed at least:

A) annually.
B) twice each year.
C) every two years.

Question #85 of 180 Question ID: 1614657

The continuously compounded annual rate of return that would increase the value of
an investment by 20% in three years is closest to:

A) 5.7%.
B) 6.1%.
C) 6.7%.
Question #86 of 180 Question ID: 1614664

For a test with sample size n of whether two variables are correlated, the critical
values are based on:

A) n degrees of freedom.
B) n – 1 degrees of freedom.
C) n – 2 degrees of freedom.

Question #87 of 180 Question ID: 1614834

A member or candidate who changes his recommendation on a stock can comply with
the Standards by communicating this change to clients according to:

A) size of the client.

B) known interest of the client in the stock.
C) number of shares of the stock owned by the client.

Question #88 of 180 Question ID: 1614698

Under Modigliani and Miller's assumptions, if taxes exist and interest costs are tax-
deductible, the optimal proportion of debt in a firm's capital structure:

A) is 100%.
B) increases linearly with the tax rate.
C) depends on the costs of financial distress.

Question #89 of 180 Question ID: 1614677

An advantage of a common market, relative to a customs union or a free trade area, is

that a common market:

A) adopts a single currency.

B) removes barriers to movement of labor and capital.
C) establishes common institutions and economic policy.

Question #90 of 180 Question ID: 1614717

Hazel Edwards, CFA, is analyzing Collins Footwear, Inc. and obtains the following data
for the company's major geographic segments:

Asia Europe North America

Sales (U.S. dollars) $200 million $300 million $500 million

Net profit margin 4.5% 3.0% 1.5%

Asset turnover 1.5× 2.5× 4.0×

Based on these data, Edwards should conclude that Collins's:

A) smallest segment by assets is Asia.

B) most profitable segment by return on assets is Europe.
C) most profitable segment by net income is North America.

Question #91 of 180 Question ID: 1572673

An investor buys a non-dividend paying stock for $100 at the beginning of the year
with 50% initial margin. At the end of the year, the stock price is $95. Deflation of 2%
occurred during the year. Which of the following return measures for this investment
will be greatest?

A) Real return.
B) Nominal return.
C) Leveraged return.

Question #92 of 180 Question ID: 1614692

While analyzing HMS Inc., Fred Browne notes that the company's liquidity as
measured by its quick ratio has decreased over time while its current liabilities have
remained constant. This could be explained by:

A) a decrease in inventory.
B) an increase in marketable securities.
C) a decrease in accounts receivable.

Question #93 of 180 Question ID: 1614685

Stephanie Dell is evaluating two stocks (X and Y) using the capital asset pricing model.
Dell predicts that the betas for the two stocks will be identical but that the
unsystematic risk for Stock X will be much higher than for Stock Y. According to the
capital asset pricing model, in equilibrium:

Stock X will have a higher expected return than Stock Y but a standard deviation
A)
equal to Stock Y.
Stock X will have a higher standard deviation than Stock Y but an expected return
B)
equal to Stock Y.
both the expected return and standard deviation for Stock X will be higher than
C)
Stock Y.

Question #94 of 180 Question ID: 1614790

A hedge fund's lockup period is the time during which:

A) the fund is closed to new investors.

B) an investor may not redeem shares in the fund.
C) the fund must return cash to an investor who has requested a redemption.

Question #95 of 180 Question ID: 1614728

Joe Leoni is an institutional equity trader. He believes that stock price and volume
information can help him consistently generate excess returns on his stock picks.
Based on this information, Leoni most likely believes that the market:

A) is not strong-form efficient.

B) may be semi-strong or strong-form efficient.
C) is not weak-form efficient, but may be semi-strong efficient.

Question #96 of 180 Question ID: 1614792

Which of the following fintech applications is most likely to use distributed ledger
technology?

A) Real-time clearing and settlement of securities trades.

B) High-frequency trading to take advantage of intraday price discrepancies.
C) Automated review of employees’ voice communications to detect misconduct.

Question #97 of 180 Question ID: 1614767

A central clearing mandate for derivatives is most likely to result in:

A) increased disclosure of trades.

B) dispersion of counterparty risk.
C) standardization of derivatives contracts.

Question #98 of 180 Question ID: 1614680

Compared to a normal distribution, historical returns on major asset classes in

developed markets have exhibited:

A) less frequent large positive deviations.

B) more frequent large negative deviations.
C) the expected frequency of large deviations.
Question #99 of 180 Question ID: 1614745

A fixed-income investor who is most concerned about high rebalancing fees would
prefer to track an index that includes bonds characterized by:

A) shorter maturities and frequent new issuances.

B) longer maturities and frequent new issuances.
C) longer maturities and infrequent new issuances.

Question #100 of 180 Question ID: 1614737

If a company's revenues and cost of goods sold both increase by the same money
amount, the company's gross margin will most likely:

A) increase.
B) decrease.
C) remain the same.

Question #101 of 180 Question ID: 1614753

An investor buys a five-year bond with a coupon of 2% and expects to sell it in four
years. The investor will be most concerned with decreasing interest rates if the bond's
Macaulay duration is:

A) equal to 4.
B) less than 4.
C) greater than 4.

Question #102 of 180 Question ID: 1614784

In the context of private debt, a single loan that combines secured and unsecured
classes of debt is best described as:

A) mezzanine debt.
B) unitranche debt.
C) a leveraged loan.

Question #103 of 180 Question ID: 1614796

Which of the following statements about the asset management industry is most
accurate?

A) Smart beta is a blend of active and passive management.

B) The market share for active management has been growing over time.
C) Passive management represents about half of assets under management.

Question #104 of 180 Question ID: 1614681

Boswell is less risk-averse than Johnson. Using the same capital allocation line for
Boswell and Johnson, Boswell will have:

A) a higher risk aversion coefficient than Johnson.

B) steeper risk-return indifference curves than Johnson.
C) an optimal portfolio with a higher expected return than Johnson.

Question #105 of 180 Question ID: 1614777

In a one-period binomial model for option pricing based on risk neutrality, the
probabilities of an up-move or a down-move are:

A) equal.
B) assumed by the modeler.
C) calculated from the model inputs.

Question #106 of 180 Question ID: 1614785

A leveraged buyout fund is best described as a private equity fund that acquires:

A) public companies, with the purchase price is largely funded by debt.

B) public companies, with the purchase price is largely funded by equity.
C) private companies, with the purchase price is largely funded by equity.

Question #107 of 180 Question ID: 1614748

The following data refer to a corporate bond:

Par value: $1,000

Maturity: 10 years

Coupon rate: 5%

Coupon frequency: Semiannual

Yield-to-maturity: 6.25%

The market value of this bond is closest to:

A) $908.
B) $988.
C) $1,098.

Question #108 of 180 Question ID: 1614802

An organization is concerned it will be unable to continue to operate because it has

run out of cash. This is an example of:

A) credit risk.
B) liquidity risk.
C) solvency risk.

Question #109 of 180 Question ID: 1614735

In assessing the pricing power of companies in an industry using Porter's five forces,
an analyst will most likely determine that companies have less pricing power when:

A) barriers to entry are low.

B) the threat of substitute products is low.
C) switching costs for consumers are high.

Question #110 of 180 Question ID: 1614791

The portion of a hedge fund's return that is attributable to its exposure to specific
sectors is its:

A) alpha.
B) market beta.
C) strategy beta.

Question #111 of 180 Question ID: 1614682

The standard deviation of returns for a portfolio of risky assets is:

A) less than the standard deviation of the least risky asset.

B) greater than the standard deviation of the least risky asset.
C) less than or equal to the standard deviation of the most risky asset.

Question #112 of 180 Question ID: 1614787

A real estate fund manager that specializes in property development is most likely to
structure itself as a(n):

A) finite-life, closed-end fund.

B) indefinite-life, open-end fund.
C) indefinite-life, closed-end fund.
Question #113 of 180 Question ID: 1614725

An equal-weighted index has a value of 100 at the beginning of a period. The five
securities that make up the index have the following prices for the period:

Security Beginning price Ending price

1 20 22

2 80 72

3 130 143

4 250 225

5 320 352

The index value at the end of the period is:

A) 101.40.
B) 101.75.
C) 102.00.

Question #114 of 180 Question ID: 1614778

Institutional investors in alternative assets are most likely to progress from:

A) direct investing to co-investing to fund investing.

B) direct investing to fund investing to co-investing.
C) fund investing to co-investing to direct investing.

Question #115 of 180 Question ID: 1614794

Which of the following investors typically have the lowest need for liquidity?

A) Banks.
B) Mutual funds.
C) Defined benefit pension plans.

Question #116 of 180 Question ID: 1614721

Multilateral trading facilities (MTFs) are most accurately described as:

A) exchanges.
B) block brokers.
C) alternative trading systems.

Question #117 of 180 Question ID: 1614754

An investor holds a bond with a duration gap of +1. If the investor expects interest
rates to immediately rise, selling the bond at the end of the investor's investment
horizon would result in a:

A) loss, because price risk dominates.

B) loss, because reinvestment risk dominates.
C) gain, because reinvestment risk dominates.

Question #118 of 180 Question ID: 1614788

Infrastructure projects are most likely characterized by high:

A) barriers to entry.
B) business cycle sensitivity.
C) correlations of returns with public equities.
Question #119 of 180 Question ID: 1614683

Bearing unsystematic risk should provide no additional expected return:

A) under any circumstances.

B) if diversification is cost-free.
C) in a strong-form efficient market.

Question #120 of 180 Question ID: 1614734

An economist determines that Argove Industries is a low-cost producer in its industry.

As a result, the economist should expect that Argove can earn returns:

A) only at its cost of capital.

B) above its cost of capital both in the short run and long run.
C) above its cost of capital in the short run, but not in the long run.

Question #121 of 180 Question ID: 1614786

During which stage of a portfolio company's development does a venture capital fund
provide it with capital to prepare it for an initial public offering?

A) Later stage.
B) Formative stage.
C) Mezzanine stage.

Question #122 of 180 Question ID: 1614803

An organization's risk management process is least likely to:

A) measure its risks.

B) minimize all its risks.
C) identify its risk tolerance.
Question #123 of 180 Question ID: 1614686

A portfolio manager is reviewing the performance of a portfolio and calculates the

Treynor measure to be 4.29. The analyst should interpret this measure to mean that
the portfolio:

A) has more risk than the market.

B) outperformed the market based on systematic risk.
achieved 4.29% higher returns than a portfolio on the Security Market Line with the
C)
same level of systematic risk.

Question #124 of 180 Question ID: 1614729

Aros Funds manages a family of mutual funds and employs a team of fundamental
analysts, who research firms by analyzing financial statements and SEC filings. Under
which form(s) of the efficient market hypothesis (EMH) would Aros Funds have the
potential to achieve positive risk-adjusted returns consistently using fundamental
analysis?

A) Weak form only.

B) Semistrong form and weak form.
No form of the EMH is consistent with earning positive risk-adjusted returns using
C)
fundamental analysis.

Question #125 of 180 Question ID: 1614733

An investor in a sponsored depository receipt (DR):

A) holds the voting rights for the DR shares.

B) must obtain the foreign currency in which the DR is traded.
should be familiar with market procedures and regulations in the DR issuer’s
C)
country.
Question #126 of 180 Question ID: 1614765

Which of the following mortgage-backed securities is most likely to feature credit

tranching?

A) Sequential-pay collateralized mortgage obligations.

B) Commercial mortgage-backed securities.
C) Agency residential mortgage-backed securities.

Question #127 of 180 Question ID: 1614798

The Investment Constraints component of an IPS is least likely to state:

A) “No greater than a 3% probability of returns below –5% in any 12-month period.”
“Due to the high tax rate of the investor, capital gains are preferential to dividend
B)
payouts.”
“To comply with the investor’s religion, must not invest in securities which make
C)
explicit interest payments.”

Question #128 of 180 Question ID: 1614739

Ian Goode is analyzing the price of the preferred stock of MegaGym. Goode estimates
that MegaGym's earnings growth rate over the next five years will be 20%, and that
MegaGym's earnings will then grow at a sustainable rate of 5%. The most appropriate
method for Goode to value MegaGym's preferred stock is to:

A) use a justified price-to-earnings multiple.

use a multistage dividend discount model with 20% growth for five years and 5%
B)
thereafter.
divide the preferred dividend by the required rate of return on MegaGym’s preferred
C)
stock.

Question #129 of 180 Question ID: 1614766

A collateralized mortgage obligation with agency RMBS as the collateral is least likely
to be created to offer securities with less:

A) default risk than the underlying RMBS.

B) extension risk than the underlying RMBS.
C) prepayment risk than the underlying RMBS.

Question #130 of 180 Question ID: 1614770

Roland Carlson owns a portfolio of large capitalization stocks. Carlson has a positive
long-term outlook for the stock market, but would like to protect his portfolio from
any sudden declines in the stock market, without selling his holdings. The most likely
way for Carlson to achieve his objective of limiting the downside risk of his portfolio is
to:

A) sell put options on the S&P 500.

B) sell an S&P 500 futures contract.
C) buy an S&P 500 forward contract.

Question #131 of 180 Question ID: 1614750

Which of the following forward rates can be used to construct a forward yield curve?

A) 1-year and 2-year forward rates one year from now.

B) 1-year forward rates one year and two years from now.
C) 1-year forward rate one year from now and 2-year forward rate two years from now.

Question #132 of 180 Question ID: 1614799

Which of the following is the most likely reason for an investment manager to produce
an investment policy statement for a new client?

A) To minimize the risk level of the investments chosen.

To verify that the client understands and agrees with the policies and procedures of
B)
the investing firm.
 To ensure that the manager has a clear understanding of the client’s needs,
C)
circumstances, and constraints.

Question #133 of 180 Question ID: 1614779

An alternative investment partnership with a 2-and-20 fee structure has increased in

value each period and earned a return of 8% net of management fees in 20x7. Under
which of the following provisions would incentive fees for 20x7 be the highest?

A) 5% hard hurdle rate and a high water mark provision.

B) 6% soft hurdle rate and a high water mark provision.
C) 7% hard hurdle rate and no high water mark provision.

Question #134 of 180 Question ID: 1614744

Contingent convertible bonds are described most accurately as those which, if a

specified event occurs:

A) become convertible to equity.

B) convert automatically to equity.
C) increase the equity conversion ratio.

Question #135 of 180 Question ID: 1614731

Sacco, Inc., has nine directors on its board. Three seats are elected annually using a
cumulative voting system. An investor who owns 600 shares of Sacco common stock
may give a maximum of:

A) 600 votes to a single board candidate.

B) 1,800 votes to a single board candidate.
C) 600 votes to a candidate for each board seat.
Question #136 of 180 Question ID: 1614726

Which of the following types of index is least likely to require frequent reconstitution
of constituent securities?

A) Equity index.
B) Commodity index.
C) Fixed income index.

Question #137 of 180 Question ID: 1614684

Greenbaum, Inc. stock pays no dividend and currently trades at $54. Based on the
CAPM and assuming an expected return on the market of 12% and a risk-free rate of
8%, the expected price for Greenbaum one year from now is $62. The beta of
Greenbaum shares is closest to:

A) 1.5.
B) 1.6.
C) 1.7.

Question #138 of 180 Question ID: 1614774

The time value of a put option on an asset that provides no cash flows would most
likely be increased by:

A) an increase in the exercise price.

B) an increase in the asset’s price volatility.
C) a decrease in the value of the underlying asset.

Question #139 of 180 Question ID: 1614780

Compared to traditional investments, alternative investments are least likely to

exhibit:

A) higher fees.
B) less manager specialization.
C) more concentrated portfolios.

Question #140 of 180 Question ID: 1614738

An investor places a market order to buy a stock on the holder-of-record date for the
stock's next dividend. Is the investor entitled to receive this dividend?

A) No, because the order is placed after the declaration date.

B) No, because the order is settled after the holder-of-record date.
C) Yes, because the order is executed on the holder-of-record date.

Question #141 of 180 Question ID: 1614759

Ann Lloyd observes that a 3-year senior unsecured bond of Hawk, Inc. has a rating of
Baa3/BBB– and a 3-year senior unsecured bond of Osprey, Inc. has a rating of
Ba1/BB+. Based only on this information, Lloyd can most appropriately conclude that:

A) credit risk is greater for the Osprey bond than for the Hawk bond.
B) loss severity is greater for the Osprey bond than for the Hawk bond.
C) the Hawk bond is investment grade and the Osprey bond is non-investment grade.

Question #142 of 180 Question ID: 1614782

Because of biases in return measurements, hedge fund data are most likely to:

A) overstate returns and overstate risk.

B) overstate returns and understate risk.
C) understate returns and overstate risk.

Question #143 of 180 Question ID: 1614804

The sensitivity of a derivative's value to the price of the underlying asset is measured
by the derivative's:

A) beta.
B) delta.
C) gamma.

Question #144 of 180 Question ID: 1614741

An analyst develops the following information to value a common stock.

Last year's earnings per share = $4.00

Real risk-free rate = 4%
Inflation premium = 5%
Return on equity (ROE), expected to remain constant in the future = 10%
Dividend payout, expected to remain stable in the future = 30%
Stock's beta = 1.4
Expected market return = 14%

The value per share is closest to:

A) $14.39.
B) $21.28.
C) $31.39.

Question #145 of 180 Question ID: 1614749

Bond X and Bond Y were issued at a premium to par value three years ago. Bond X
matures in five years, and Bond Y matures in ten years. Both bonds carry the same
credit rating. Bond X has a coupon of 7.25%, and Bond Y has a coupon of 8.00%. If the
yield to maturity for both bonds is 7.60% today:

A) both bonds are priced at a premium.

B) Bond X is priced at a premium, and Bond Y is priced at a discount.
C) Bond X is priced at a discount, and Bond Y is priced at a premium.
Question #146 of 180 Question ID: 1614776

An investor uses options on a stock to create a synthetic short position in a risk-free

bond that will pay the exercise price at option expiration. To create this position, the
investor will buy:

A) a put option.
B) a call option.
C) the underlying stock.

Question #147 of 180 Question ID: 1614723

Kate Johnson owns shares of a stock that currently trades at $15. If Johnson wants to
buy more shares if the price increases to $17, she should enter a:

A) stop buy order at $17.

B) limit order to buy at $17.
C) market order to buy at $17.

Question #148 of 180 Question ID: 1614789

A commodity market is in contango if the spot price is:

A) higher than futures prices.

B) equal to futures prices.
C) lower than futures prices.

Question #149 of 180 Question ID: 1614764

A waterfall structure in a securitized bond issue:

A) is a form of external credit enhancement.

B) allows the entire issue to obtain a better credit rating.
C) gives some bondholders a higher priority of claims than others.
Question #150 of 180 Question ID: 1614768

A put option with an exercise price of $75 sells for a premium of $10. At expiration,
the put buyer may experience a loss:

A) of as much as $10.
B) of as much as $65.
C) that is theoretically unlimited.

Question #151 of 180 Question ID: 1614756

Chris Renburg owns the following portfolio of option-free bonds:

Par value Full price Duration

$3,000,000 $2,400,000 4.625

$3,500,000 $3,600,000 7.322

$1,500,000 $1,200,000 9.300

$8,000,000 $7,200,000

The duration of Renburg's bond portfolio is closest to:

A) 6.6.
B) 6.8.
C) 7.0.

Question #152 of 180 Question ID: 1614736

A firm attempts to gain market share from its competitors by improving its
manufacturing efficiency so that it can increase output and reduce the price of its
product. This firm's competitive strategy is most accurately described as:

A) an offensive differentiation strategy.

B) an offensive cost leadership strategy.
C) a defensive cost leadership strategy.
Question #153 of 180 Question ID: 1614746

Which of the following sources of short-term funding for banks is most likely to have
the lowest interest cost?

A) Interbank funds.
B) Checking deposits.
C) Central bank funds.

Question #154 of 180 Question ID: 1614771

The convenience yield associated with holding the underlying asset of a derivative is
most accurately described as:

A) the nonmonetary benefits of holding the asset.

B) the monetary and nonmonetary benefits of holding the asset.
the monetary and nonmonetary benefits of holding the asset, net of its holding
C)
costs.

Question #155 of 180 Question ID: 1614800

The problem of investment managers taking offsetting active positions is most likely
addressed by employing:

A) risk budgeting.
B) tactical asset allocation.
C) a core-satellite approach.

Question #156 of 180 Question ID: 1614757

Which of the following bonds is most likely to have the greatest convexity at a yield to
maturity of 3.5%?
A) 2-year, 3% coupon bond.
B) 5-year, 4% coupon bond.
C) 10-year, zero-coupon bond.

Question #157 of 180 Question ID: 1614760

Yield spreads are most likely to widen in a market environment that exhibits:

A) slowing economic growth.

B) high GDP growth rates.
C) lower-than-normal supply of new bond issuance.

Question #158 of 180 Question ID: 1614724

A securities exchange is structured as a call market. On that exchange, a stock would

trade at:

A) any time the market is open.

B) one negotiated price that clears the market.
C) prices set by auction or by dealer bid-ask quotes.

Question #159 of 180 Question ID: 1614742

Enterprise value is most accurately interpreted as the:

A) cost to take over a firm.

B) fair market value of a firm’s equity.
C) market value of a firm’s equity plus the market value of its debt.

Question #160 of 180 Question ID: 1614781

The period of time during which a private capital fund will select investments and
direct committed capital to them is best described as a:

A) notice period.
B) lockup period.
C) drawdown period.

Question #161 of 180 Question ID: 1614751

Kathy Hurst is valuing a 4-year zero coupon security and has acquired the following
information:

1-year spot rate 6.0%

4-year spot rate 7.5%

1-year forward rate 1 year from now 7.3%

1-year forward rate 3 years from now 8.9%

The 1-year forward rate 2 years from now is closest to:

A) 7.3%.
B) 7.8%.
C) 8.0%.

Question #162 of 180 Question ID: 1614775

An investor writes a put option that will expire in six months with an exercise price of
23 when the underlying price is 20. The investor will collect a premium that is:

A) equal to 3.
B) less than 3.
C) greater than 3.

Question #163 of 180 Question ID: 1614801

An investor who would only sell shares he owns for $58 or more, but would not buy
the same shares for more than $53, is exhibiting:

A) status quo bias.

B) endowment bias.
C) conservatism bias.

Question #164 of 180 Question ID: 1614730

Regulations are most likely to increase market efficiency if they:

A) increase the availability of information.

B) limit short-selling to qualified investors.
C) decrease the incidence of arbitrage trading.

Question #165 of 180 Question ID: 1614772

For an underlying asset with no holding costs or benefits, the no-arbitrage forward
price equals:

A) the spot price.

B) the future value of the spot price.
C) zero at initiation of a forward contract.

Question #166 of 180 Question ID: 1614758

Effective duration is the most appropriate measure of interest rate risk when:

A) a bond’s credit rating may change significantly.

B) the investor is seeking to minimize a duration gap.
C) the path of interest rate changes affects a bond’s cash flows.
Question #167 of 180 Question ID: 1614762

A bond indenture states that the source of funds for repayment will be tolls paid by
drivers using a highway constructed with the bond proceeds. This bond is most likely
a:

A) secured bond.
B) revenue bond.
C) quasi-government bond.

Question #168 of 180 Question ID: 1614743

Jim Boo is analyzing Justin Corp., a maker of home appliances. Boo's research provides
the following facts:

Justin's stock price is $60 per share.

Expected growth rate of dividends is 5%.
Expected retention rate is 60%.
Required rate of return is 10%.

Justin's expected price to earnings ratio (P0/E1) is closest to:

A) 8.0x.
B) 10.0x.
C) 12.0x.

Question #169 of 180 Question ID: 1614797

Which of the following pooled investments is likely to require the smallest minimum
investment amount?

A) Wrap fee account.

B) Market neutral fund.
C) Closed-end mutual fund.
Question #170 of 180 Question ID: 1614773

With regard to equivalent forward and futures contracts with an interest rate as the
underlying, convexity bias results in:

A) no significant differences between forward and futures prices in practice.

significant differences between forward and futures prices for long-term interest
B)
rates.
significant differences between forward and futures prices for short-term interest
C)
rates.

Question #171 of 180 Question ID: 1614727

A given percentage change in one of the 30 stocks in the Dow Jones Industrial Average
(DJIA) will have the greatest impact on the DJIA for which index stock?

A) The one whose total equity has the highest market value.
B) The one whose stock trades at the highest dollar price per share.
C) The one having the greatest amount of equity in its capital structure.

Question #172 of 180 Question ID: 1614761

Bond X carries a rating of BBB-/Baa3. Bond Y has a rating of B/B2. Both bonds mature
in 10 years. Which bond's value would be most affected by a ratings downgrade, and
which bond has the higher default risk?

Bond X would be more affected by a ratings downgrade, but Bond Y has higher
A)
default risk.
Bond Y would be more affected by a ratings downgrade, but Bond X has higher
B)
default risk.
Bond X has higher default risk, but both bonds would experience similar effects of a
C)
ratings downgrade.

Question #173 of 180 Question ID: 1614722

An investor purchased a stock for $60 a share using margin from his broker. If the
initial margin requirement is 40%, and the maintenance margin requirement is 20%, a
margin call will initially be triggered below a share price of:

A) $30.
B) $45.
C) $48.

Question #174 of 180 Question ID: 1614783

Arkex Funds is a hedge fund with a value of $100 million at the beginning of the year.
Arkex Funds charges a 2.0% management fee based on assets under management at
the beginning of the year and a 20.0% incentive fee with a 5.0% hard hurdle rate.
Incentive fees are calculated net of management fees. The value of the fund at the
end of the year before fees is $110 million. The net return to investors is closest to:

A) 6.8%.
B) 7.4%.
C) 8.0%.

Question #175 of 180 Question ID: 1614769

An investor buys an October 80 put option on a stock for a premium of $5. On the
expiration date the stock price is 78 per share. The investor's gain or loss on the
option is:

A) a loss of $2.
B) a loss of $3.
C) a gain of $2.

Question #176 of 180 Question ID: 1614755

An investor buys an annual pay, 4% coupon bond for 102. The trade will settle
immediately after the annual coupon payment and the bond has five years left to
maturity. The investor sells the bond two years later for 101.5. The investor's holding
period return on the bond includes:

A) a capital loss.
B) a capital gain.
C) neither a capital loss nor gain.

Question #177 of 180 Question ID: 1614752

Gerald Snow is a bond manager for Long Vision Investments. Snow is evaluating
potential arbitrage opportunities. He has the following list of bonds:

Bond X is a 1-year zero coupon bond selling at 950.

Bond Y is a 2-year zero coupon bond selling at 850.
Bond Z is a 2-year bond with an annual coupon of 8%.

All three bonds have a par value of $1,000. If no arbitrage opportunity exists, the price
of Bond Z is closest to:

A) $975.
B) $995.
C) $1,015.

Question #178 of 180 Question ID: 1614795

An equally weighted portfolio of five securities has a standard deviation of returns of

10%. The average standard deviation of returns of the five securities is 15%. If another
security with a standard deviation of returns of 15% is added to the portfolio, and the
weights are adjusted to restore equal weighting, the portfolio's diversification ratio is
most likely to:

A) increase.
B) decrease.
C) remain unchanged.
Question #179 of 180 Question ID: 1614740

Larry Rile is evaluating the investment merits of Bing Corp., a successful motorcycle
manufacturer. Rile is forecasting a dividend in year 1 of $1.50 per share, a dividend in
year 2 of $3.00 per share, and a dividend in year 3 of $4.50 per share. After year 3, Rile
expects dividends to grow at the rate of 6% per year. Rile calculates a beta of 1.3 for
Bing. Rile expects the S&P 500 index to return 8%. The U.S. Treasury bill is yielding 2%.
Using the multistage dividend discount model, Bing's intrinsic value is closest to:

A) $92 per share.

B) $102 per share.
C) $112 per share.

Question #180 of 180 Question ID: 1614763

Mountie Bank is a financial institution with a $300 million senior unsecured bond
outstanding. Mountie is considering setting up MB Trust as a bankruptcy remote
special purpose entity. If MB Trust issues a $500 million bond through a securitized
transaction secured by Mountie's customer receivables, the MB Trust bond would:

A) be senior to the Mountie bond.

B) rank pari passu with the Mountie bond.
C) not have a seniority ranking relative to the Mountie bond.
Question #1 of 180 Question ID: 1614732

A market can be characterized as efficient if assets':

A) book values equal their market values.

B) intrinsic values equal their book values.
C) market values equal their intrinsic values.
Explanation
In an efficient market, assets' market values should reflect their intrinsic values. Book
values seldom equal market or intrinsic values because book values do not reflect
investors' expectations.
(Module 43.1, LOS 43.b and Module 44.2, LOS 44.g)

Question #2 of 180 Question ID: 1614793

A direct investment in a cryptocurrency is said to occur when:

A) a transaction is recorded on the blockchain.

B) the purchase of a cryptocurrency stock is settled.
C) an investor takes a position in a cryptocurrency futures contract.
Explanation
Direct investment in cryptocurrencies occurs when a transaction is recorded on the
blockchain. Cryptocurrency stocks and cryptocurrency futures are indirect investments.
(Module 84.2, LOS 84.c)

Question #3 of 180 Question ID: 1614675

Long-term shifts in population from one country to a neighboring country are best
described as which type of geopolitical risk?

A) Event risk.
B) Thematic risk.
C) Exogenous risk.
Explanation
Geopolitical risks represent the possibility of things occurring which negatively impact
peaceful international relations. Population shifts occur over long periods of time,
which is indicative of a thematic risk. Event risk relates to the unknown outcome of
specific events where the occurrence date is known. Exogenous risk is related to
unanticipated events.
(Module 16.1, LOS 16.d)

Question #4 of 180 Question ID: 1614699

A website produces content that it allows the public to view for free. Users may post
comments on the site's content if they register with the website and agree to permit it to
show them targeted advertisements. The website's business model is best described as
being based on:

A) hidden revenue.
B) crowdsourcing.
C) network effects.
Explanation
Hidden revenue is generated from sources other than the user of a product, such as
advertising on a free website. Crowdsourcing refers to a business model that depends
on user contributions; in this case the website produces its own content. Network
effects are increases in the value of a network as its user base increases; based only on
the information given this does not describe the website's business model.
(Module 28.1, LOS 28.a, LOS 28.b)

Question #5 of 180 Question ID: 1614805

A professional organization most appropriately enforces upon its members:

A) legal standards only.

B) ethical standards only.
C) both legal and ethical standards.
Explanation
Professional organizations adopt codes of ethics that govern their members' behavior.
Legal standards are enforced by governments or regulatory agencies.
(Module 89.1, LOS 89.f)
Question #6 of 180 Question ID: 1614747

Assuming annual compounding, the price of a zero-coupon bond with a face value of
$1,000, maturing 10 years from today, with a yield to maturity of –1.5% is closest to:

A) $860.
B) $1,015.
C) $1,160.
Explanation
FV = 1,000; PMT = 0; N = 10; I/Y = –1.5; CPT PV = 1,163.15.
(Module 2.1, LOS 2.a and Module 54.1, LOS 54.a)

Question #7 of 180 Question ID: 1614809

Thomas Baker recently passed the Level III CFA examination. Baker is reviewing a draft of
the firm's marketing material to be distributed after he receives his CFA charter. One
passage reads, "Baker passed all three Levels of the CFA exam on his first attempts in
three consecutive years." Is this statement in compliance with CFA Institute Standards?

A) Yes, as long as it is a statement of fact.

B) No, because it implies that Baker has superior ability.
No, because Members or Candidates who passed the exams on their first attempts
C)
may not differentiate themselves from those who did not.
Explanation
Stating that Baker passed the exams in consecutive years is acceptable, if in fact he did
so, according to Standard VII(B) Reference to CFA Institute, the CFA Designation, and
the CFA Program.
(Module 93.1, LOS 93.b)

Question #8 of 180 Question ID: 1614661

If an investor uses a threshold return of 0% in calculating the safety-first ratio, which

combination of expected returns and standard deviations is most desirable?

A) Expected return of 7% and standard deviation of 9%.

B) Expected return of 6% and standard deviation of 8%.
C) Expected return of 4% and standard deviation of 6%.
Explanation
With a threshold return of 0%, the safety-first ratio condenses to the expected return
divided by the standard deviation, and the most desirable portfolio is the one with the
highest ratio. An expected return of 7% relative to a standard deviation of 9% is a ratio
of 0.78, which is higher than 6% / 8% = 0.75 or 4% / 6% = 0.67.
(Module 5.1, LOS 5.c)

Question #9 of 180 Question ID: 1614687

An owner of a business is most likely to have limited liability if he is a:

A) shareholder.
B) sole proprietor.
C) general partner.
Explanation
Shareholders are the owners of a corporation and have limited liability. Sole
proprietors and general partners have unlimited liability.
(Module 22.1, LOS 22.a)

Question #10 of 180 Question ID: 1614660

An analyst determines that there is a 60% probability that a stock price will end the year
at $12 per share. If there is an equivalent probability that the stock will end the year at
either $10 or $16, the expected value of the stock price is:

A) $11.20.
B) $12.40.
C) $13.60.
Explanation
The expected value is equal to each potential value multiplied by the probability of its
occurrence. If there is a 60% probability that the stock price will end the year at $12, an
equivalent probability of ending at either $10 or $16 implies a 20% probability of each.
The expected value is equal to 0.60 (12) + 0.20 (10) + 0.20 (16) = $12.40.
(Module 4.1, LOS 4.a)

Question #11 of 180 Question ID: 1614810

Telling potential investors that a short-term U.S. Treasury fund contains "guaranteed"
securities:

A) does not violate any Standard.

B) violates the Standards by misrepresenting the securities in the fund.
violates the Standards by failing to consider the suitability of the fund for potential
C)
investors.
Explanation
Standard I(C) Misrepresentation does not prohibit members and candidates from
making truthful statements that some investments, such as U.S. Treasury securities,
are guaranteed in one way or another. Suitability does not become a concern until the
potential clients take investment action.
(Module 93.1, LOS 93.b)

Question #12 of 180 Question ID: 1614710

When a company grants stock options to employees, the company is required to:

A) value the options using the Black-Scholes-Merton model.

B) disclose how the options affect the income statement and balance sheet.
C) recognize the fair value of the options as an expense in the period of the grant date.
Explanation
Disclosure requirements for employee stock options include their effect on the
company's earnings and financial position. The Black-Scholes-Merton model is one
method for determining the fair value of stock options, but accounting standards do
not specify that this model must be used. As with all share-based compensation plans,
both IFRS and U.S. GAAP require the company to estimate the fair value at the grant
date and expense it to the income statement over the vesting period.
(Module 36.2, LOS 36.b, LOS 36.c)

Question #13 of 180 Question ID: 1614811

Riley and Smith, a broker-dealer, is bringing to market a secondary offering for All Pro
Company. One of the reasons All Pro selected the firm to lead the offering is because
Riley and Smith has been a market maker for All Pro's stock for the past five years. The
firm is in possession of material nonpublic information relevant to All Pro's offering. To
be in compliance with the Code and Standards, Riley and Smith:

A) may not serve as underwriter for the same stock in which it acts as a market maker.
 should continue to serve as market maker but take only the contra side of
B)
unsolicited customer trades.
should abstain from making a market in All Pro stock during the offering period but
C)
may resume market making activities after the offering.
Explanation
The firm should continue making a market but should only carry out unsolicited
transactions for clients. A complete withdrawal from market-making activities could be
a signal to outsiders that a significant transaction is underway.
(Module 93.1, LOS 93.b)

Question #14 of 180 Question ID: 1614672

Tax policy that is designed to minimize its interference with market forces is said to
exhibit:

A) fairness.
B) efficiency.
C) sufficiency.
Explanation
Efficiency, in the context of tax policy, refers to minimizing interference with market
forces and disincentives to work. Sufficiency refers to whether tax policy raises enough
revenue to meet the government's spending needs. Fairness of a tax policy is
commonly expressed in terms of "horizontal equality" (people in similar situations pay
similar taxes) or "vertical equality" (richer people pay more taxes).
(Module 14.2, LOS 14.c)

Question #15 of 180 Question ID: 1614715

An analyst who believes a company's financial reporting is aggressive would most likely
point out:

A) low salvage value estimates for fixed assets.

B) large valuation allowances for deferred tax assets.
C) longer useful lives of equipment than those of peer companies.
Explanation
Aggressive accounting choices will increase reported earnings or improve the
company's reported financial position. Estimating a longer useful life for equipment will
decrease the annual depreciation expense recorded on the income statement (which
increases reported earnings) and decrease accumulated depreciation on the balance
sheet (which improves the reported financial position). Low salvage value estimates
increase depreciation expense each period, and large valuation allowances decrease a
net deferred tax asset on the balance sheet.
(Module 38.1, LOS 38.c and Module 38.2, LOS 38.g)

Question #16 of 180 Question ID: 1614806

Which of the following statements is most accurate regarding the GIPS requirement for
definition of the firm?

A) The firm must be the distinct business entity held out to clients.
If a firm has offices in different geographical locations, the firm definition may include
B)
just the primary location where all the investment decisions are made.
The firm definition may include the corporation or a subsidiary of the corporation, but
C)
the firm cannot be defined as simply a “division” of the corporation.
Explanation
The GIPS-compliant firm definition must be the corporation, subsidiary, or division that
holds itself out to the client as a specific business entity. If the firm has different
geographic locations, this firm definition should include all the locations.
(Module 92.1, LOS 92.d)

Question #17 of 180 Question ID: 1614689

Which of the following is most accurate regarding information asymmetry in

corporations?

A) Management has more information than shareholders.

B) Shareholders have more information than debtholders.
C) The board of directors has more information than management.
Explanation
Information asymmetry refers to the fact that management has more information
about the company than its shareholders. Some debtholders, such as banks, may have
more information about a company than is available to the public, including
shareholders.
(Module 24.1, LOS 24.a)
Question #18 of 180 Question ID: 1614663

Which of the following statements is most accurate regarding parametric and

nonparametric tests?

A) A z-test is an example of a parametric test, while a t-test is nonparametric.

B) Both kinds of tests assume that the underlying data are normally distributed.
Data that are ranks rather than values are best evaluated using a
C)
nonparametric test.
Explanation
Data that are ranked (ordinal) rather than presented as values are best evaluated using
a nonparametric test. Many parametric tests assume the underlying data are normally
distributed, but nonparametric tests typically do not. Both z-tests and t-tests are
examples of parametric tests.
(Module 8.2, LOS 8.c)

Question #19 of 180 Question ID: 1614673

A central bank's long-term policy goal for the exchange rate of its domestic currency is
most likely to be to pursue:

A) stability.
B) appreciation.
C) depreciation.
Explanation
One of the standard goals for a central bank is for stability in the exchange rate of the
domestic currency relative to foreign currencies.
(Module 15.1, LOS 15.a)

Question #20 of 180 Question ID: 1614812

Ray Brown, CFA, gives prospects his firm's marketing materials, not prepared by him,
that indicate he has a graduate degree from State University, when in fact he did
graduate work there but did not receive a degree. Brown informed the marketing
department of this error when he first saw it. Brown has:
A) violated the Standards by misrepresenting his qualifications.
B) not violated the Standards because he has informed his firm of the mistake.
not violated the Standards because he did not prepare the marketing materials or
C)
misrepresent his credentials to his firm.
Explanation
Brown has violated Standard I(C) Misrepresentation by giving prospects firm marketing
materials that he knows are incorrect.
(Module 93.1, LOS 93.b)

Question #21 of 180 Question ID: 1614719

An analyst asks a number of her colleagues, who she believes have no emotional
investment in the matter, for their views on a particular company. Which bias is the
analyst most likely trying to mitigate by seeking these opinions?

A) Confirmation bias.
B) Conservatism bias.
C) Illusion of control bias.
Explanation
Confirmation bias causes analysts to seek out or pay attention to data that affirms
their earlier convictions, and to disregard or underestimate information that calls those
opinions into question. This may be mitigated by seeking out the points of view of
colleagues who have no emotional investment in the opinion. Conservatism bias refers
to an analyst making only small adjustments to prior forecasts when new information
becomes available. Illusion of control bias refers to overestimating what an analyst can
control and trying to control things an analyst cannot control. This can be mitigated by
focusing only on variables with known explanatory power, and by seeking outside
opinions from those who have a relevant perspective (note that a relevant perspective
is different to an opinion with no emotional investment).
(Module 40.1, LOS 40.b)

Question #22 of 180 Question ID: 1614813

Which of the following statements is most accurate about the Standard concerning
knowledge of the law? Members and candidates are responsible for violations:

A) that are proven by a regulatory authority.

B) of which they are aware or should be aware.
C) in which they knowingly participate or assist.
Explanation
Standard I(A) Knowledge of the Law holds members and candidates responsible for
violations in which they knowingly participate or assist. The Standard is not limited to
violations that are proven by a regulatory authority. Although the Standard strongly
encourages members and candidates to report potential violations of which they are
aware, the Standard does not require them to do so.
(Module 93.1, LOS 93.b)

Question #23 of 180 Question ID: 1614814

Andrew Pollard, CFA, overhears two executives from a multinational oil company
discussing an unexpectedly large earnings increase the company is preparing to
announce the following morning. When Pollard gets home that evening, he places an
order to buy shares in this oil company. Which of the following best describes this
situation?

A) Pollard violated the Standards by acting on material nonpublic information.

There is no violation of CFA Institute Standards since this was simply an overheard
B)
conversation.
Pollard violated CFA Institute Standards by not contacting counsel for advice before
C)
placing the trade.
Explanation
Pollard has enough information to determine that the overheard information is indeed
material nonpublic information. No matter how this information was obtained, even
through an overheard conversation, Pollard may not act or cause others to act on it.
Even if he had contacted internal counsel before placing the trade, Pollard would have
violated Standard II(A) Material Nonpublic Information.
(Module 93.1, LOS 93.b)

Question #24 of 180 Question ID: 1614688

Bill Jones holds ten $1,000 par, 6% bonds maturing in 3 years. Kathy Reed holds 200
shares of common stock from the same company. Which of the following statements is
most accurate about their respective investments?

A) Both investors have unlimited upside and limited downside exposure.

B) Jones’s investment has a lower priority of claims than Reed’s investment.
C) Reed’s investment may return more cash overall than Jones’s investment.
Explanation
Reed as an equity holder has unlimited upside potential, while Jones will not receive
more than the scheduled interest and principal payments. Both investors have limited
downside exposure because the worst that can happen is Jones receives no interest or
principal and Reed's stock goes to zero. Jones as a debtholder has a higher priority of
claims than Reed as an equity holder.
(Module 23.1, LOS 23.a)

Question #25 of 180 Question ID: 1614703

A firm has recently incurred the following costs in relation to two projects.

Project 1: Purchase of a copyright for $1,000 6 months ago, although there is now an
active market valuing this asset at $1,700.

Project 2: Research costs of $4,000 and development costs of $7,000. In addition to these
costs, advertising costs associated with the project were $2,000.

Under U.S. GAAP, these projects will increase intangible assets on the balance sheet by:

A) $1,000.
B) $8,000.
C) $12,700.
Explanation
Under U.S. GAAP, purchased intangible assets are recorded at cost (and then
amortized if applicable), so Project 1 will add $1,000 to intangible assets. All R&D costs
are expensed under U.S. GAAP, unlike IFRS where research is expensed but
development capitalized. Advertising costs are expensed under both. Therefore none
of the costs incurred for Project 2 can be capitalized and intangible assets will not be
affected.
(Module 31.1, LOS 31.a)

Question #26 of 180 Question ID: 1614690

Which of the following is most likely to improve a company's cash position, other things
equal?

A) Decreasing days’ payables.

B) Decreasing inventory turnover.
C) Decreasing credit terms from 2/60 to 2/45.
Explanation
Changing credit terms from 2/60 to 2/45 can be expected to result in the earlier receipt
of payments on credit purchases, improving a company's cash position. Decreasing
days' payables and decreasing inventory turnover will both result in reduced operating
cash flow.
(Module 25.1, LOS 25.a)

Question #27 of 180 Question ID: 1614815

A member provides a client with an investment performance presentation that does not
include detailed information, but reflects the member's reasonable efforts to present
results that are fair, accurate, and complete. Has the member complied with the
Standard related to performance presentation?

A) Yes, the member has met the requirements of the Standard.

No, because the performance presentation must comply with Global Investment
B)
Performance Standards.
No, because “reasonable efforts” do not ensure that the presentation is fair, accurate,
C)
and complete.
Explanation
Brief presentations are acceptable if they include a statement that detailed information
is available upon request. Standard III(D) Performance Presentation requires members
and candidates to make reasonable efforts to ensure fair, accurate and complete
presentation of results. While compliance with GIPS is recommended to meet Standard
III(D) obligations, use of GIPS is not required.
(Module 93.1, LOS 93.b)

Question #28 of 180 Question ID: 1614669

Peaks and troughs in the business cycle are most likely to appear earliest as measured
by the:

A) growth cycle.
B) classical cycle.
C) growth rate cycle.
Explanation
The growth rate cycle shows peaks and troughs earlier than the classical cycle or the
growth cycle.
(Module 13.1, LOS 13.a)
Question #29 of 180 Question ID: 1614816

Gary Hoskins, CFA, runs a macro strategy hedge fund. The hedge fund has a short
position in July osmium futures. Hoskins attempts to gain control of the available supply
of osmium that can be delivered in July, which will cause holders of long July futures to
make offsetting trades instead of settling by delivery. Has Hoskins violated the Standard
concerning market manipulation?

A) Yes.
B) No, because Hoskins is executing an arbitrage trade.
C) No, because Hoskins is not manipulating the price of osmium.
Explanation
Hoskins is attempting to manipulate the price of a derivative by securing a controlling
position in the underlying asset, which is a violation of Standard II(B) Market
Manipulation.
(Module 93.1, LOS 93.b)

Question #30 of 180 Question ID: 1614693

A project with a conventional cash flow pattern has a net present value of $15,000. If the
discount rate used was 6%, the project's internal rate of return is:

A) equal to 6%.
B) less than 6%.
C) greater than 6%.
Explanation
If the NPV is positive, this implies that the IRR must be greater than the discount rate.
(Module 26.1, LOS 26.b)

Question #31 of 180 Question ID: 1614807

Which of the following statements best describes how GIPS requires portfolios to be
grouped into composites?

A discretionary portfolio should be included in all composites that are consistent with
A)
the assets held.
 All discretionary portfolios must be included in a composite, but only if they are still
B)
managed by the firm.
Each composite must include all discretionary portfolios that the firm has
C)
managed according to a particular strategy or style.
Explanation
All discretionary portfolios, current and past, must be included in one and only one
composite.
(Module 92.1, LOS 92.c)

Question #32 of 180 Question ID: 1614700

Which of the following is the most likely reason why an analyst needs to monitor
developments in financial reporting standards?

A) Company managements may choose aggressive or conservative accounting policies.

Financial statements might not always present a company’s economic reality
B)
accurately.
Changes in accounting standards may require a company to restate its
C)
financial statements.
Explanation
Monitoring developments allows an analyst to understand changes in financial
reporting standards and therefore how these changes affect a company's financial
statements and analysis such as ratios.
(Module 29.1, LOS 29.d)

Question #33 of 180 Question ID: 1614671

A national government that wants to increase economic growth through fiscal policy is
most likely to:

A) decrease the discount rate.

B) purchase government securities.
C) increase spending on infrastructure.
Explanation
Fiscal policy tools include government spending and taxation. Monetary policy tools
include the purchase or sale of government securities and changes in the discount
rate.
(Module 14.1, LOS 14.a)
Question #34 of 180 Question ID: 1614712

The following data appear on the balance sheet of a U.S. GAAP reporting company:

Gross deferred tax asset at the beginning of the year = $10,500

Gross deferred tax asset at the end of the year = $11,250

Valuation allowance at the beginning of the year = $2,700

Valuation allowance at the end of the year = $3,900

Based only on this information, the company's earnings in future periods are expected
to:

A) increase.
B) decrease.
C) remain relatively stable.
Explanation
The valuation allowance account increased from $2,700 to $3,900. Management will
increase a valuation allowance contra to a DTA when future earnings are expected to
decrease, thereby reducing the value of the DTA.
(Module 37.2, LOS 37.b)

Question #35 of 180 Question ID: 1614691

Drags on liquidity are most likely to include:

A) inventory obsolescence.
B) paying vendors too soon.
C) suppliers requiring payment sooner.
Explanation
Drags on liquidity either delay or reduce cash inflows. Obsolete inventory can be
expected to sell more slowly and often will require write-downs of inventory value.
Paying vendors sooner than is optimal and shorter payment periods for suppliers
accelerate cash outflows and are referred to as pulls on liquidity.
(Module 25.1, LOS 25.b)
Question #36 of 180 Question ID: 1614713

Other things equal, which of the following conditions would place a company highest on
a spectrum of financial reporting quality?

A) Reported earnings that are not sustainable.

B) Efforts by management to keep net income steady over time.
Financial statements that reflect the company’s economic activities accurately but are
C)
not in compliance with accounting principles.
Explanation
Earnings quality may be low in a period because of one-time gains that do not
otherwise call a company's financial reporting quality into question. Earnings
smoothing or reporting that does not comply with generally accepted accounting
principles represents a lower quality of financial reporting.
(Module 38.1, LOS 38.b)

Question #37 of 180 Question ID: 1614705

A company purchases an asset in the first quarter and decides to capitalize the asset.
Compared to expensing the asset cost, capitalizing the asset cost will result in higher
cash flows in the first quarter from:

A) investing.
B) financing.
C) operations.
Explanation
Capitalizing the cost of the asset results in higher CFO and lower CFI in the period of
the purchase, compared to expensing the entire cost. If the cost is expensed, the cash
outflow is classified as CFO, but if the asset is capitalized, the cash outflow is classified
as CFI. Cash flow from financing is not affected by the decision to capitalize.
(Module 32.1, LOS 32.a)

Question #38 of 180 Question ID: 1614817

Moe Girard, CFA, works in a large group that decides on recommendations by consensus.
Girard does not always agree with the group consensus, but he is confident in the
group's analytical ability. To comply with the Code and Standards when the group issues
a recommendation with which he disagrees, Girard:
A) does not need to take any action.
B) must request that his name be removed from the group’s report.
C) should include his independent opinion as an appendix to the group’s report.
Explanation
Standard V(A) Diligence and Reasonable Basis does not require a Member to dissociate
from a group recommendation, as long as the opinion has a reasonable and adequate
basis.
(Module 93.1, LOS 93.b)

Question #39 of 180 Question ID: 1614818

Jimmy Deininger, CFA, manages several client portfolios. One of his clients offers him use
of a cabin in a vacation spot because the client's investment results under Deininger's
management have exceeded the client's goals. Deininger discloses the gift to his
employer. With reference to the Standards of Practice, Deininger:

A) has complied with the Standards and may accept the gift.
is not permitted to accept the gift because he does not have permission from his
B)
employer.
has appropriately disclosed the gift to his supervisor, but must also disclose it to his
C)
other clients.
Explanation
Gifts from a client are distinguished from gifts from entities attempting to influence the
portfolio manager's behavior, such as a broker. Deininger has complied with Standard
I(B) Independence and Objectivity because he disclosed the gift from the client to his
employer. This requirement is in place so that the employer can monitor the situation
to guard against any favoritism towards the gift-giving client. The Standards do not
require disclosing this gift to other clients. Permission would be required if the client's
gift was to be based on future account performance.
(Module 93.1, LOS 93.b)

Question #40 of 180 Question ID: 1614707

In periods of rising prices and stable or increasing inventory quantities, compared with
companies that use LIFO inventory accounting, companies that use the FIFO method will
have:

A) higher COGS and lower taxes.

B) higher net income and higher taxes.
 C) lower inventory balances and lower working capital.
Explanation
FIFO companies have higher net income, lower COGS, higher inventory, and higher
taxes.
(Module 34.2, LOS 34.b)

Question #41 of 180 Question ID: 1614695

Martin Zwingle is making a capital allocation decision with regard to a new project. The
initial expense of the project would cause the company's earnings per share for the
current year to come in below analysts' expectations. If Zwingle decides against the
project, his firm will allocate his division a smaller capital budget next year. Which of
these factors are appropriate for Zwingle to include in the capital allocation decision?

A) Both of these factors are appropriate.

B) Neither of these factors is appropriate.
C) Only one of these factors is appropriate.
Explanation
Two common capital allocation pitfalls are basing investment decisions on the change
in earnings per share in the short term and considering the effects of not spending the
entire capital budget available for the current period.
(Module 26.2, LOS 26.c)

Question #42 of 180 Question ID: 1614667

A manufacturing plant exhibits diseconomies of scale if long-run average cost (LRAC) is:

decreasing as output increases, and the plant is at its minimum efficient scale if LRAC is
A)
at its lowest level.
decreasing as output increases, and the plant is at its minimum efficient scale if LRAC is
B)
decreasing over the entire range of output.
increasing as output increases, and the plant is at its minimum efficient scale
C)
if LRAC is at its lowest level.
Explanation
Diseconomies of scale are present when long-run average cost increases as output
increases. The minimum efficient scale is the plant size that produces the quantity of
output for which LRAC is at a minimum.
(Module 12.1, LOS 12.a)
Question #43 of 180 Question ID: 1614676

Placing a tariff on imports of a good is most likely to decrease:

A) producer surplus for domestic producers of the good.

B) quantity of the good supplied by domestic producers.
C) quantity of the good demanded in the domestic market.
Explanation
Placing a tariff on an imported good increases the good's domestic price, which
reduces the quantity demanded. However, the quantity supplied by domestic firms
increases with the domestic equilibrium price, as does producer surplus for domestic
firms.
(Module 17.1, LOS 17.b)

Question #44 of 180 Question ID: 1614666

The standard error of estimate in a simple linear regression is equal to:

A) the square root of the mean squared error.

B) the sum of squares regression divided by the sum of squares total.
C) the sum of squared errors divided by the degrees of freedom for the error term.
Explanation
The standard error of estimate is the standard deviation of the residuals and is equal
to the square root of the mean squared error. The sum of squares regression divided
by the sum of squares total is the coefficient of determination (R2). The sum of squared
errors divided by the degrees of freedom for the error term is the mean squared error.
(Module 10.2, LOS 10.d)

Question #45 of 180 Question ID: 1614670

Data for a manufacturing industry indicate that inventories of work in progress are
increasing faster than sales. This is most likely to indicate that:

A) the business cycle is at a peak.

B) inventory is becoming obsolete.
C) firms expect demand to increase.
Explanation
An increase in work-in-progress inventory relative to sales is likely to result from firms
increasing production because they expect an increase in demand. An increase in
finished goods inventories relative to sales would be more likely to indicate a decrease
in demand that may be caused by obsolete inventory or a business cycle peak.
(Module 13.1, LOS 13.c)

Question #46 of 180 Question ID: 1614678

Consider two currencies, the VKN and the PKR. The PKR is trading at an annual premium
of 2.3% relative to the VKN in the forward market. The 1-year risk-free PKR rate is 3.0%. If
no arbitrage opportunities are available, the current 1-year risk-free VKN interest rate is
closest to:

A) 0.7%.
B) 2.3%.
C) 5.3%.
Explanation
Because the PKR is trading at a forward premium (the forward VKN/PKR exchange rate
is greater than the spot VKN/PKR exchange rate), the VKN interest rate must be greater
than the PKR interest rate. VKN should have an interest rate higher than that for PKR
by the amount of the forward premium, or approximately 3.0% + 2.3% = 5.3%.
(Module 19.1, LOS 19.b)

Question #47 of 180 Question ID: 1614656

Frank Jones is considering three separate investments. Investment 1 pays a stated

annual interest rate of 6.1%, compounded annually. Investment 2 pays a stated annual
interest rate of 6.0%, compounded monthly. Investment 3 pays a stated annual interest
rate of 5.9%, compounded quarterly. Which investment should Smith choose?

A) Investment 1.
B) Investment 2.
C) Investment 3.
Explanation
Because Investment 1 is compounded annually, its effective annual interest rate is
equal to the stated annual rate of 6.1%.
Investment 2 has an effective annual interest rate equal to:

[1 + (0.06 / 12)]12 − 1 = 6.17%

Investment 3 has an effective annual interest rate equal to:

[1 + (0.059 / 4)]4 − 1 = 6.03%

Jones should choose Investment 2 since it has the highest effective annual interest
rate.
(Module 1.3, LOS 1.d)

Question #48 of 180 Question ID: 1614819

Carlos Mendez, CFA, is beginning an investment advisory relationship with a new client
and plans to formulate an investment policy statement (IPS) for the client. According to
the Standard concerning suitability, Mendez is least likely to consider the client's:

A) regulatory and legal circumstances.

B) conflicts of interest.
C) performance measurement benchmarks.
Explanation
Under Standard III(C) Suitability, the investment advisor should consider the following
in writing an investment policy statement (IPS) for each client: (1) client identification
(type and nature of clients, existence of separate beneficiaries, and approximate
portion of total client assets); (2) investment objectives (return objectives and risk
tolerance); (3) investor constraints (liquidity needs, time horizon, tax considerations,
legal and regulatory circumstances, unique needs and preferences); and (4)
performance measurement benchmarks. Standard VI(A) Disclosure of Conflicts
requires that members and candidates disclose all potential areas of conflict to clients,
but this disclosure is not part of a client's IPS.
(Module 93.1, LOS 93.b)

Question #49 of 180 Question ID: 1614668

Wilmer Jones owns several restaurants in different cities. His restaurants compete on
quality of food and service, price, and marketing. Competitors can enter and exit his
markets, and there are usually several competitors in each market. His market structure
can best be characterized as:
A) perfect competition.
B) monopolistic competition.
C) oligopoly.
Explanation
This is an example of monopolistic competition because this market has low barriers to
entry and exit, and features product differentiation.
(Module 12.3, LOS 12.e)

Question #50 of 180 Question ID: 1614808

With regard to performance measurement, the Global Investment Performance

Standards for firms:

A) require time-weighted rates of return.

B) require money-weighted rates of return.
C) permit both time-weighted and money-weighted rates of return.
Explanation
Sections 4 and 6 of the GIPS standards for firms specify requirements when using time-
weighted rates of return, and Sections 5 and 7 specify requirements when using
money-weighted rates of return.
(Module 92.1, LOS 92.b)

Question #51 of 180 Question ID: 1614820

A portfolio manager of a city's police pension fund owes his duty of loyalty to the:

A) city’s taxpayers.
B) pension trustees.
C) plan beneficiaries.
Explanation
When managing a pension plan or trust, the manager owes his duty of loyalty to the
ultimate beneficiaries, not the person or entity that hired the manager.
(Module 93.1, LOS 93.b)

Question #52 of 180 Question ID: 1614821

Matt O'Neill, CFA, is an advisor for Century Investments, a retail financial services firm.
Century has a firmwide policy that its advisors recommend the firm's own investment
products to clients unless Century does not offer a product suitable for the client's
needs. Can O'Neill follow his firm's policy without violating the Code and Standards?

A) Yes, if O’Neill discloses this policy to his clients.

B) Yes, if his firm’s offerings are competitive with other available products.
C) No, because the policy conflicts with the Standard on loyalty, prudence, and care.
Explanation
Standard III(A) Loyalty, Prudence, and Care states that members and candidates must
inform clients of any limitations that affect their advisory relationships. A policy to
favor recommending a firm's own products is an example of such a limitation.
(Module 93.1, LOS 93.b)

Question #53 of 180 Question ID: 1614694

An appropriate way to address the effectiveness of a company's management in creating

value for shareholders is to compare the company's:

A) net profit margin to its cost of equity.

B) weighted average cost of capital to its return on invested capital.
C) total cost of debt and equity financing to its earnings before interest and taxes.
Explanation
When the return on invested capital exceeds the weighted average cost of capital, firm
management is creating value for shareholders.
(Module 26.1, LOS 26.b)

Question #54 of 180 Question ID: 1614704

An IFRS reporting firm holds equity securities as investments and classifies them for
financial reporting as measured at fair value through profit and loss. Can the firm
reclassify these securities as measured at fair value through other comprehensive
income?

A) Yes.
B) No, because IFRS does not permit this classification for equity securities.
C) No, because the firm did not choose this treatment at the time of purchase.
Explanation
Under IFRS, equity securities are measured at fair value through profit and loss, unless
the firm elects at the time of purchase to treat them as measured at fair value through
other comprehensive income.
(Module 31.1, LOS 31.c)

Question #55 of 180 Question ID: 1614822

Wayne Sergeant, CFA, is an independent investment advisor who works with individuals.
A longtime client asks Sergeant if he can recommend an attorney. Sergeant refers his
client to Jim Chapman, a local attorney who is also a friend of Sergeant's. Previously,
Chapman had agreed to perform some legal work for Sergeant in exchange for the
referral of new clients. Do Sergeant's actions violate CFA Institute Standards of
Professional Conduct?

A) No, because the client is under no obligation and is still free to select another attorney.
Yes, because Sergeant is making a recommendation that is not independent and
B)
objective.
Yes, because Sergeant did not disclose the nature of his arrangement with
C)
Chapman to his client.
Explanation
Standard VI(C) Disclosure of Conflicts requires members to disclose to their clients any
compensation or benefit received by, or paid to, others for the recommendation of
services. Sergeant's failure to disclose that he receives legal services for his referral of
clients to Chapman is in violation of the Standards.
(Module 93.1, LOS 93.b)

Question #56 of 180 Question ID: 1614823

Ron Brenner, CFA, manages portfolios for individuals. One of his clients, John Perlman,
offers Brenner several inducements above those provided by his employer to motivate
superior future performance in managing his portfolio. Brenner notifies his manager via
e-mail about the terms of this offer, and his employer grants permission. According to
the Standard on additional compensation arrangements, Brenner:

A) must notify “all parties involved,” which includes his other clients.
B) has taken all the actions required to accept the arrangement.
should decline this arrangement because it could cause partiality in the handling of
C)
other client accounts.
Explanation
Brenner's actions comply with the conditions specified in Standard IV(B) Additional
Compensation Arrangements. He notified his employer in writing (e-mail is acceptable)
of the terms and conditions of additional compensation arrangement and received
permission from his employer. Loyalties to other clients may be affected, but it is the
employer's duty to determine this. Nothing in the Standard specifies that "all parties
involved" includes other clients.
(Module 93.1, LOS 93.b)

Question #57 of 180 Question ID: 1614674

A central bank's policy rate is considered expansionary if it is less than:

A) the central bank’s target inflation rate.

B) the long-term growth rate of real economic output.
the sum of the long-term growth rate of real economic output and the target
C)
inflation rate.
Explanation
Monetary policy is said to be expansionary if the central bank's policy rate is less than
the neutral interest rate, which is the sum of the long-term trend rate of real economic
growth and the central bank's target inflation rate.
(Module 15.2, LOS 15.c)

Question #58 of 180 Question ID: 1614711

Dot Corporation uses accelerated depreciation for tax purposes and straight-line
depreciation for financial reporting. The company has a large cash position which is
invested in tax-free municipal bonds. With regard to Dot's financial statements and tax
reporting:

both the interest income and the depreciation method will necessitate the use of a
A)
valuation allowance account.
the interest income will result in a deferred tax asset and the depreciation method will
B)
result in a deferred tax liability.
the depreciation expense causes a temporary difference between income tax
C) expense and taxes payable, and the interest income creates a permanent
difference.
Explanation
The interest income from municipal bonds is a permanent difference; thus, no deferred
taxes are created and the difference is reflected in the company's effective tax rate.
The different depreciation methods result in temporary differences that are expected
to reverse. In the case of depreciation, a deferred tax liability is created. Valuation
allowance accounts only apply to deferred tax assets and are created when it becomes
probable that the company will not have enough future income to realize the full value
of the deferred tax assets.
(Module 37.1, LOS 37.a)

Question #59 of 180 Question ID: 1614824

Denise Chavez, CFA, is the senior energy analyst for a major brokerage firm. Chavez is
also a social and environmental activist, and is opposed to coal-fired power plants. She
has been arrested twice for trespassing during organized pickets at some of these power
plants. Chavez has recently accepted a volunteer position as Board member of
Greensleeves, a foundation that lobbies governments on environmental issues. The
position will involve significant volunteer hours, including some travel. Are Chavez's
activities consistent with CFA Institute Standards?

Chavez violated the Standards by being arrested, but the volunteer Board position is
A)
not a violation.
The environmental activism is not a violation, but the Standards prohibit Chavez from
B)
accepting the Board position.
The activism and subsequent arrests are not a violation, but Chavez must
C)
disclose the Board position to her employer.
Explanation
Although Chavez was arrested, Standard I(D) Misconduct is not intended to cover acts
of "civil disobedience." Standard IV(A) Loyalty, Chavez has a duty of loyalty to her
employer. While she will not be compensated for the Greensleeves' Board position, the
duties may be time-consuming and should be discussed with her employer in advance.
(Module 93.1, LOS 93.b)

Question #60 of 180 Question ID: 1614825

With respect to a client's confidential information, if a member or candidate believes a

client is engaging in illegal activity, the member should most appropriately:

A) preserve the client’s confidentiality.

B) report the client to the appropriate governmental authorities.
 C) seek advice from his firm’s legal counsel or compliance department.
Explanation
Guidance for Standard III(E) Preservation of Confidentiality states that members or
candidates should seek the advice of compliance personnel or legal counsel about the
appropriate actions to take if they suspect illegal activity by clients. Members and
candidates must comply with applicable laws, which may require or prohibit disclosure
of confidential client information in these circumstances.
(Module 93.1, LOS 93.b)

Question #61 of 180 Question ID: 1614718

Bivac Corp. has been experiencing a declining return on equity over the past few years.
Selected financial statement ratios for Bivac appear below:

Prior Year Current Year

Tax Burden 0.60 0.62

Interest Burden 0.80 0.81

EBIT Margin 0.26 0.26

Asset Turnover 1.06 1.06

ROE 0.15 0.14

What is the most likely reason for the decline in Bivac's ROE?

A) Leverage has declined.

B) The tax rate has increased.
C) Net profit margin has declined.
Explanation
ROE can be broken out as:
ROE = Tax burden × Interest burden × EBIT Margin × Asset Turnover ×
Leverage
Prior Year: 0.15 = 0.60 × 0.80 × 0.26 × 1.06 × Leverage
Current Year: 0.14 = 0.62 × 0.81 × 0.26 × 1.06 × Leverage
Solving the equation for leverage reveals that the measure has decreased from 1.13 in
the prior year to 1.01 in the current year. This indicates Bivac is using less debt in its
capital structure and is the most likely reason the company's ROE has declined.
The company's net profit margin has increased:
Net profit margin (Prior Year): 0.60 × 0.80 × 0.26 = 0.12
Net profit margin (Current Year): 0.62 × 0.81 × 0.26 = 0.13
The company's tax rate has decreased from 0.40 = (1 − 0.60) to 0.38 = (1 − 0.62).
(Module 39.4, LOS 39.d)

Question #62 of 180 Question ID: 1614697

The capital structure theory that implies an optimal capital structure employing both
debt and equity is:

A) pecking order theory.

B) static trade-off theory.
C) Modigliani and Miller with taxes.
Explanation
Static trade-off theory assumes that increasing debt proportions will initially reduce the
weighted average cost of capital (because of tax savings), but that at some level of debt
financing, increasing expected costs of financial distress will outweigh additional tax
savings of greater debt issuance. Modigliani and Miller with taxes implies an optimal
capital structure of 100% debt. Pecking order theory does not imply an optimal capital
structure.
(Module 27.2, LOS 27.d)

Question #63 of 180 Question ID: 1614826

Jenny Pickler, a Level II CFA Candidate, writes an economic forecast containing several
interest rate projections. Her firm's investment committee reviews Pickler's report and
changes several of the interest rates Pickler had forecast. To comply with CFA Institute
Standards, Pickler:
A) does not need to take any further action.
B) should ask that her name be removed from the report.
is required to independently review the data supporting the investment committee’s
C)
changes.
Explanation
According to Standard V(A) Diligence and Reasonable Basis, group consensus is not
required in the course of preparation of analytical reports. Pickler would only need to
have her name removed from the report if she had reason to believe the investment
committee did not have a reasonable and adequate basis for their changes.
(Module 93.1, LOS 93.b)

Question #64 of 180 Question ID: 1614720

An analyst is forecasting a company's sales and costs. He notes that the company's
product demand is elastic, and that the unit price of its product is expected to increase
by 4% over the forecast period. The analyst should forecast the company's revenue to:

A) increase.
B) decrease.
C) remain constant.
Explanation
Because product demand is elastic, the units demanded will decrease by more than the
4% price increase. Overall this means total revenue will decrease.
(Module 40.1, LOS 40.d)

Question #65 of 180 Question ID: 1614658

An analyst has calculated the arithmetic, harmonic, and geometric mean using the last 10
years of returns on a stock. Which of these means should the analyst most appropriately
use to forecast next year's return on the stock?

A) Harmonic mean.
B) Geometric mean.
C) Arithmetic mean.
Explanation
The arithmetic mean is statistically the best estimate (expected value) of the next year's
return. The harmonic mean is not typically used to compute the historical performance
or forecast the expected performance of an investment; rather it is used to compute
the average cost of shares purchased over time. The geometric mean is used to
calculate average annual compound returns. It is the best estimate of future multi-year
annual compound returns, but the arithmetic mean is the best estimate of a single
year's return.
(Module 3.1, LOS 3.a)

Question #66 of 180 Question ID: 1614659

The histogram of returns data for the Accel Equity Fund has a long left tail and is more
peaked than a normal distribution. Based on the histogram, the distribution of returns
for Accel has:

A) positive skewness.
B) negative skewness.
C) negative excess kurtosis.
Explanation
The histogram contains a long left tail, which indicates significant negative skew for the
distribution. If the histogram contained a long right tail, the distribution would have
exhibited positive skew. A distribution with negative excess kurtosis (i.e., a platykurtic
distribution) is less peaked and has thinner tails compared to a normal distribution. A
distribution that is more peaked and has thicker tails compared to a normal
distribution has positive excess kurtosis (i.e., a leptokurtic distribution).
(Module 3.2, LOS 3.c)

Question #67 of 180 Question ID: 1614827

Recommended procedures for compliance with the Standard concerning misconduct

suggest that firms in the investment industry should:

periodically test their employees’ knowledge of applicable laws, regulations, and the
A)
firm’s code of ethics.
periodically inform employees of violations that have occurred and the disciplinary
B)
actions that the firm took against the employees involved.
check references of potential employees to verify that they are of good
C)
character and eligible for employment in the investment industry.
Explanation
Checking the references given by potential employees is one of the recommended
procedures for compliance with Standard I(D) Misconduct. Other recommended
procedures are that the firm adopt a code of ethics and inform employees of potential
violations and their consequences for disciplinary action. Neither testing employees'
knowledge of laws and regulations nor informing them of actual violations by other
employees is specified as a recommended procedure.
(Module 93.1, LOS 93.b)

Question #68 of 180 Question ID: 1614716

A company understates year-end depreciation. As compared to the properly stated year-

end results, what effect will this understatement have on the company's asset turnover
ratio?

A) No impact.
B) Decrease.
C) Increase.
Explanation
Asset turnover equals sales / average total assets. Understating depreciation expense
has no effect on sales. The lower depreciation will result in understatement of
accumulated depreciation, so assets will be overstated. The higher level of assets will
decrease the asset turnover ratio.
(Module 39.2, LOS 39.b)

Question #69 of 180 Question ID: 1614679

A spot exchange rate is 8.6145 and the 1-year forward quotation is +0.25%. The 1-year
forward quotation on a points basis is closest to:

A) 2.
B) 25.
C) 215.
Explanation
Convert the percentage quote to a points quote as 0.0025 × 8.6145 = 0.0215, which is
215 points (each point is 0.0001).
(Module 19.1, LOS 19.b)
Question #70 of 180 Question ID: 1614702

Thunderbird Company reported net income of $500 million and the company had 100
million common shares outstanding. In addition, Thunderbird had 5 million shares of
convertible preferred and 10 million outstanding warrants during the year. Each
preferred share pays a dividend of $4 per share and is convertible into three common
shares. Each warrant is convertible into one common share at $25 per share. The
company's stock traded at an average $50 per share. Thunderbird's diluted earnings per
share for the year is closest to:

A) $4.00 per share.

B) $4.20 per share.
C) $4.80 per share.
Explanation

$500 million−$20 million

Basic EPS = = $4.80 per share
100 million

Preferred dividend = 5 million × $4 = $20 million

Shares created from conversion = 5 million shares × 3 shares = 15 million
shares

$20 million
= $1.33, convertible preferred is dilutive
15 million

$50−$25
Shares created from warrant = [ ] × 10 million shares = 5 million shares
$50

Exercise price < average price, warrants are dilutive.

$500 million
Diluted EPS = = $4.17 per share
100 million+15 million+5 million

(Module 30.4, LOS 30.d)

Question #71 of 180 Question ID: 1614665

The regression line in a simple linear regression model minimizes the sum of the
squared differences between:

A) the values of the dependent variable and its mean.

B) the predicted and actual values of the dependent variable.
C) the model’s errors and the standard error of the dependent variable.
Explanation
The best-fitting linear relationship between the dependent and independent variables
is defined as that which minimizes the sum of squared errors, where the errors are the
differences between the predicted and actual values of the dependent variable. '
(Module 10.1, LOS 10.a)

Question #72 of 180 Question ID: 1614701

Mullins Company's financial statements include an auditor's report with a qualified

opinion. This most likely implies that the:

A) auditor is reasonably assured that the financial statements are free of material errors.
financial statements include exceptions to the applicable accounting
B)
standards but are presented fairly.
financial statements are materially out of compliance with the applicable accounting
C)
standards and are not presented fairly.
Explanation
An auditor will issue a qualified opinion if the financial statements include exceptions
to applicable accounting standards and will explain the nature and effect of these
exceptions. An auditor will issue an adverse opinion if the financial statements are not
presented fairly.
(Module 29.1, LOS 29.c)

Question #73 of 180 Question ID: 1614828

Which of the following statements is most accurate? An analyst who changes employers
and wants to maintain coverage of a stock:

A) may copy supporting records from the prior firm and use them at the new firm.
must re-create the supporting records at the new firm with information from
B)
public sources or from the covered firm.
may maintain his recommendations at the new firm without re-creating the supporting
C)
documentation if those recommendations had a reasonable basis.
Explanation
Supporting records for analyst recommendations are the property of the analyst's firm.
A member or candidate who changes firms may not take these records without
permission. To continue coverage of the same securities at a new firm, a member or
candidate must re-create the supporting records based on information from the
covered firm or from publicly available sources.
(Module 93.1, LOS 93.b)
Question #74 of 180 Question ID: 1614829

After taking the Level I exam, Willie Winchester posts a comment on a social media
website wondering why the exam had no questions about interest rate risk and currency
risk. Winchester has:

A) violated the Code and Standards by discussing the CFA Program on social media.
violated the Code and Standards by disclosing confidential information about
B)
the exam.
not violated the Code and Standards because he did not disclose specific exam
C)
questions.
Explanation
Winchester violated Standard VII(A) Conduct as Participants in CFA Institute Programs
by revealing topics that were not tested on the exam. Candidates are not restricted
from discussing the CFA Program in general.
(Module 93.1, LOS 93.b)

Question #75 of 180 Question ID: 1614706

During 20X1, Tusa Company sold machinery with an original cost of $100,000, and
recognized a $15,000 gain from the sale. At the time of the sale, the accumulated
depreciation of the machinery was $80,000. Ignoring taxes, the machinery sale will
produce a:

A) $15,000 inflow from investing activities.

B) $20,000 inflow from operating activities.
C) $35,000 inflow from investing activities.
Explanation
Ignoring taxes, the cash flow for 20X1 consists of the sale proceeds. The sale proceeds
equal $35,000, or the $20,000 book value ($100,000 cost – $80,000 accumulated
depreciation) plus the $15,000 gain. The proceeds are reported as an inflow from
investing activities.
(Module 32.1, LOS 32.b)

Question #76 of 180 Question ID: 1614830

With regard to independent practice by Members and Candidates who are employed, the
Code and Standards specify that:

A) undertaking independent practice includes preparations to begin such practice.

written consent must be obtained from both the employer and clients who may be
B)
affected.
members and candidates contemplating independent competitive business
C) must notify their current employer of the types of services to be rendered,
duration, and compensation.
Explanation
Standard IV(A) Loyalty requires that members and candidates notify their employer all
details of the independent practice and receive the employer's consent before
engaging in the competitive activity, but does not require any statement from firm
clients. If the independent practice is likely to affect clients negatively, the employer
can refuse permission. Making preparations to begin a competitive practice is allowed,
as long as it does not interfere with current employment duties.
(Module 93.1, LOS 93.b)

Question #77 of 180 Question ID: 1614708

For the last few years, firms in an expanding industry have found it more difficult to keep
up with consumer demand despite steadily increasing inventory levels. The Consumer
Price Index (CPI) has been at a level of 1050, 1060, and 1087 in the last three years. Given
this situation, a firm in this industry that seeks to report higher net income would most
likely prefer which inventory accounting method?

A) LIFO.
B) FIFO.
C) Average cost.
Explanation
In a period of rising prices and rising inventory levels, FIFO results in the highest net
income (lowest COGS).
(Module 34.2, LOS 34.b)

Question #78 of 180 Question ID: 1614714

Jo Evans analyzes the financial statements of Shubert Company and writes, "Shubert's
earnings, while sustainable, provide an inadequate return to shareholders." Evans has
expressed a concern with Shubert's:

A) quality of reported results only.

B) financial reporting quality only.
C) quality of reported results and financial reporting quality.
Explanation
Adequacy and sustainability of earnings are issues related to quality of reported
results. Financial reporting quality refers to issues related to the relevance and faithful
representation of financial reports.
(Module 38.1, LOS 38.a)

Question #79 of 180 Question ID: 1614831

Isaac Jones, CFA, is a portfolio manager for a major brokerage firm. Jones wishes to buy
Maxima common stock for some of his clients' accounts. Jones also wishes to purchase
Maxima for his personal account. In accordance with CFA Institute Standards, Jones may
purchase Maxima for his personal account:

A) only after completing the transactions for his clients.

along with the purchases for his clients, as long as this is disclosed in advance to his
B)
clients and employer.
at any time, as long as the execution price is not more favorable than the execution
C)
price received by the clients.
Explanation
In accordance with Standard VI(B) Priority of Transactions, employer and client
transactions must take priority over any personal transactions, meaning any
transactions in which the member or candidate is the beneficial owner. Disclosure is
not enough to comply with this Standard and the execution price is not relevant.
(Module 93.1, LOS 93.b)

Question #80 of 180 Question ID: 1614662

A method of estimating the standard error of the sample mean that involves calculating
the means of repeated samples, each with one observation omitted from the initial
samples, is most appropriately termed the:

A) jackknife method.
B) bootstrap method.
C) sample reduction method.
Explanation
The procedure described is the jackknife method. The standard deviation of the means
of samples, all with one of the sample observations deleted, is then used as the
estimated standard error of the sample mean.
(Module 7.1, LOS 7.c)

Question #81 of 180 Question ID: 1614832

With respect to the responsibilities of supervisors, the Code and Standards state that
those with supervisory responsibility:

A) may not delegate supervisory responsibility.

B) are in violation if an employee under their supervision commits securities fraud.
must institute procedures to prevent and detect violations of rules and
C)
regulations by those subject to their supervision.
Explanation
Standard IV(C) Responsibilities of Supervisors requires members and candidates with
supervisory responsibility to make reasonable efforts to detect and prevent violations
of rules and regulations (as well as of the Code and Standards) by those under their
supervision. The fact that violations occur is not necessarily evidence that reasonable
efforts were not made. In large organizations, delegating supervisory responsibility
may be necessary, but this does not relieve the person with overall authority of
supervisory responsibility.
(Module 93.1, LOS 93.b)

Question #82 of 180 Question ID: 1614696

A firm has one actively traded bond issue outstanding, with a 6% coupon and a yield to
maturity of 5%. When estimating the firm's weighted average cost of capital (WACC), the
appropriate after-tax cost of debt capital is:

A) between 5% and 6%.

B) less than 5%.
C) equal to 6%.
Explanation
Yield to maturity is an appropriate estimate of a firm's before-tax cost of capital. Its
after-tax cost of capital may be estimated as YTM × (1 – tax rate) and will be less than
the before-tax cost of capital, as long as the firm faces a positive tax rate.
(Module 27.1, LOS 27.a)

Question #83 of 180 Question ID: 1614709

A decrease in accumulated depreciation is most likely to result from:

A) selling or disposing of a long-lived asset.

B) increasing the salvage value of a long-lived asset.
C) decreasing the estimated useful life of a long-lived asset.
Explanation
When a long-lived asset is sold or otherwise disposed of, its original cost and
accumulated depreciation are removed from the balance sheet. Changing the
estimated salvage value or useful life of a long-lived asset will change depreciation
expense in the subsequent periods but does not affect accumulated depreciation.
(Module 35.2, LOS 35.b)

Question #84 of 180 Question ID: 1614833

The Standard concerning suitability recommends that the objectives and constraints of
an investment policy statement should be reviewed at least:

A) annually.
B) twice each year.
C) every two years.
Explanation
Recommendations for compliance with Standard III(C) Suitability state that an
investment policy statement should be reviewed at least annually. The
recommendations also note that changes in market conditions or client circumstances
may make more frequent updates necessary.
(Module 93.1, LOS 93.b)

Question #85 of 180 Question ID: 1614657

The continuously compounded annual rate of return that would increase the value of an
investment by 20% in three years is closest to:

A) 5.7%.
B) 6.1%.
C) 6.7%.
Explanation
The continuously compounded annual rate of return is ln(1.20) / 3 = 0.0608 or 6.08%.
(Module 1.3, LOS 1.d)

Question #86 of 180 Question ID: 1614664

For a test with sample size n of whether two variables are correlated, the critical values
are based on:

A) n degrees of freedom.
B) n – 1 degrees of freedom.
C) n – 2 degrees of freedom.
Explanation
The test statistic for the hypothesis that correlation = 0 follows a t-distribution with n –
2 degrees of freedom.
(Module 9.1, LOS 9.a)

Question #87 of 180 Question ID: 1614834

A member or candidate who changes his recommendation on a stock can comply with
the Standards by communicating this change to clients according to:

A) size of the client.

B) known interest of the client in the stock.
C) number of shares of the stock owned by the client.
Explanation
Although simultaneous distribution of information is preferred, distributing
recommendations, or changes of recommendations, first to those clients who have
previously expressed interest in these types of securities is acceptable. Giving
preferred treatment to larger accounts would violate Standard III(B) Fair Dealing.
(Module 93.1, LOS 93.b)