Mock Exam B: Session 1 Questions

Question 1
L1ET-MS05-ME0001-1604
Rajiv Patel is planning on leaving his employer. He has provided two-week notice to his
supervisor, who reminded Patel that he signed a nonsolicitation agreement with his
employer. Under that agreement, he may not solicit clients to join his new firm for at
least one year after his employment ends. Patel has an account with a professional
social media website on which many of his clients have joined his network. Neither his
employer nor Patel has announced his planned departure to any clients. When is it
appropriate for Patel to update his employment status on the social network's profile?
a) He may update his profile immediately.
b) In two weeks when his employment officially ends.
c) He may not update his profile until the one-year anniversary of his
departure.
Question 2
L1ET-AS05-ME0002_2212
Hebert DePlaine, CFA, is a portfolio manager who directs most of his commission
business to Gamma Brokers. DePlaine is active with a charity that raises funds for
terminally ill children. As a gesture of gratitude for his business, Gamma makes a $1,000
donation in DePlaine's name to the charity. Because he does not benefit financially from
the gift, DePlaine decides not to disclose the gift to his supervisor. Has DePlaine violated
the Standards of Professional Conduct?
a) Yes, because the donation is greater than $200.
b) Yes, because he received a nonfinancial benefit.
c) No, because he did not benefit personally from the gift.
Question 3
L1ET-MS05-ME0002-1604
Philip Marit, CFA, is a new analyst with Alpha Advisors. He has been hired to follow the
computer industry, replacing Nancy Engle, who was promoted to the head of research at
the firm. Engle has placed a “buy” recommendation on Dull Computers for the last year,
which has performed well. Because of her success with the stock, Engle instructed Marit
not to change the rating under any circumstances. Marit's best course of action is to:
a) maintain the “buy” rating as instructed.
b) include Engle's name on the future “buy” recommendations.
c) decline to use his name on recommendations on Dull that were not reached
through appropriate analysis.
Question 4
L1ET-AS05-ME0003-1702
Bill Parker developed a stock-picking model and back-tested it using historical data
from 20X1 to 20X6. The model produced a 40% average annual return over the testing
period. After using the model to manage his personal portfolio in 20X7, it realized an
annual return of 36%. In a marketing brochure, Parker describes the model as “a
reliable system that has yielded average returns in excess of 35% per year over the last
seven years.” To avoid violating Standards I (C): Misrepresentation and III (D):
Performance Presentation, Parker must disclose that the performance record:
a) includes trading his personal portfolio.
b) includes simulated results.
c) is unlikely to be repeated.
Question 5
L1ET-MS05-ME0003-1604
While working at Equity Research Partners, Tanya Kirk developed a sophisticated
spreadsheet model for forecasting earnings and cash flow for domestic companies. She
recently left Research Partners to start her own firm. Kirk may:
a) take her notes with her but not the electronic spreadsheet.
b) take the electronic spreadsheet but not her notes.
c) re-create the electronic spreadsheet from scratch.
Question 6
L1ET-AS05-ME0004_2212
Steve Wilcox, CFA, is a senior portfolio manager with Capital Alpha Managers (CAM) and
former professional baseball player. He heard through an acquaintance that the Nash
Foundation for the Arts is looking for an asset manager to handle the emerging markets
segment of its $800 million portfolio. Wilcox attends a series of arts gala in search of
Tom Boskin, the current chairman of the foundation. After ingratiating himself to Boskin
at an event, Wilcox begins inviting him to exclusive sporting events, elaborate dinners
with current and former athletes, and recreation on his boat. Wilcox pays for all the
expenses, reminding Boskin about CAM's ability to manage the foundation's emerging
markets investments. In the end, the foundation chose another firm, and Wilcox stopped
inviting Boskin. Did Wilcox violate the Standards of Professional Conduct?
a) Yes.
b) No, because CAM did not win the contract.
c) No, because Boskin did not solicit the invitations from Wilcox.
Question 7
L1ET-MS05-ME0004-2201
Michelle Wheeler manages the account of a high-net-worth client. The client's
investment policy statement prohibits the use of derivatives. Wheeler's valuation
models indicate that a short-term correction is forthcoming, but longer-term prospects
are still good. She feels that using protective put options (derivatives) is the most cost-
effective technique for tactically adjusting the portfolio. Wheeler's best course of action
is to:
a) sell the assets and incur whatever transaction costs and taxes arise.
b) obtain written permission from the client to deviate from the guidelines.
c) manage from a total portfolio perspective and execute the options trade.
Question 8
L1ET-AS05-ME0005_2212
Hugo Sanchet, CFA, is the chief marketing officer for Orion Investments. Orion manages
several funds, which have all underperformed their benchmarks over the last five-year
horizon. The benchmark indices have all had positive returns in each of the last five
years. Sanchet approved an advertisement that stated, “Orion's clients have prospered
under our careful management. Thanks to the Orion Method, none of our investors has
lost money in any of the last five years.” According to the Standards of Professional
Conduct, Sanchet has:
a) misrepresented his clients' experience over the past five years.
b) misrepresented his firm's skill over the past five years.
c) shrewdly, but accurately, described his firm's performance.
Question 9
L1ET-AS05-ME0006_2212
Elaine Brody is an analyst with Foxtrot Advisors. Foxtrot offers a multilevel service and
fee structure to its clients. Brody posts a summary statement about her downgrade of
Trek Chemicals on the firm's subscription website, which automatically emails clients
about postings. She also emails higher-tiered clients a full detail report and invites them
to participate in a conference call to discuss the rating. Did Brody violate the Standards
of Professional Conduct with respect to fair dealing?
a) No.
b) Yes, because standard subscribers do not have equal access to the detailed
report.
c) Yes, because the Standards require that all clients are treated equally.
Question 10
L1ET-MS05-ME0006_2212
Rene Polin, CFA, is a portfolio manager in the private wealth division of a bank. One of
Polin's clients is quite pleased with the returns his portfolio experienced over the past
three years and invites him to attend the World Series in the client's luxury suite. Polin
and his wife attend the event, enjoying the game and ample refreshments after
obtaining written consent from his supervisor. Did Polin violate the Standards of
Professional Conduct?
a) Yes, because lavish gifts may not be accepted under any circumstances.
b) Yes, because gifts from clients are judged more strictly than gifts from subject
firms.
c) No, because he obtained written consent from his supervisor prior to
acceptance.
Question 11
L1ET-AS05-ME0007-1604
Todd Elder is a junior analyst with Robust Advisors. One of his duties is to proofread
and fact-check reports issued by the firm's research department prior to release. His
supervisor, Jane Cox, notices Elder's increasingly lavish lifestyle that seems inconsistent
with his income. After checking trading records, Cox discovers that Elder has been
purchasing shares ahead of the release of the research department's recommendations.
Although the firm requires all employees to submit quarterly reports listing personal
trades, Elder has not done so. Which of the following is correct?
a) Both Elder and Cox violated the Standards.
b) Elder violated the Standards but Cox did not.
c) Cox violated the Standards but Elder did not.
Question 12
L1ET-MS05-ME0007_2212
Pablo Vega, CFA, a financial planner, recommends an annuity product from Rock Solid
Insurance, which carries the highest credit rating by several bureaus. The product is
structured to pay the higher of the return on the S&P 500 Index or 3%. In presenting the
product to a client, Vega describes the minimum return as being “guaranteed by one of
the most secure insurance companies in the industry.” Did Vega violate the Standards of
Professional Conduct by making such a claim?
a) No.
b) Yes, because no investment is without some risk.
c) Yes, because guaranteeing returns is categorically prohibited.
Question 13
L1ET-AS05-ME0009-1604
Selma Lopez was an investment banker with Southern Trust. During the course of
employment, she worked very closely with financial officers at local firms. Southern
required all investment bankers to sign a one-year noncompete agreement that
prohibits soliciting existing clients after leaving the firm. Lopez recently left Southern to
join Eastern Bank. Her attorney advises that such noncompete agreements are legally
unenforceable in her jurisdiction. According to the Standards of Professional Conduct,
Lopez may:
a) solicit former clients through publicly available information.
b) only solicit business from former clients who contact her.
c) not solicit any former clients for at least one year.
Question 14
L1ET-MS05-ME0009-1604
Lisa Bloom is a portfolio manager for Lexmore Asset Management. Her neighbor is the
popular founder and CEO of Magnus Industries. Bloom's portfolios own a significant
number of shares in Magnus. At a neighborhood party, the CEO's wife mentioned her
concern about her husband's failing health that will force him to retire very soon, well
before expected. Bloom, concerned about the effect such an announcement will have on
the stock price, sells all her portfolios' holdings in Magnus. Several weeks later, the
dynamic founder's retirement is announced and the stock price drops dramatically.
Blooms actions saved her clients' portfolios from a cumulative loss of several hundred
thousand dollars. Did Bloom violate the Standards of Professional Conduct?
 a) No.
b) Yes, because she breached a fiduciary duty to the CEO's wife.
c) Yes, because she traded on material nonpublic information.
Question 15
L1ET-AS05-ME0010-1604
William Tran, CFA, is an analyst with a large brokerage firm and covers Internet retail
companies. His research into Stuff Online, Inc. suggests a steep decline in earnings over
the next 6 to 18 months. He plans on issuing a “sell” recommendation in his next report.
The director of corporate finance calls Tran's supervisor to inform her of a pending deal
with Stuff. Both managers are concerned that a negative research report would kill the
corporate finance deal. The firm's best course of action is to:
a) give the stock a neutral rating and disclose the corporate finance relationship in
the report.
b) place the stock on a restricted list and report only factual information.
c) give the stock a negative rating without disclosing the corporate finance
relationship.
Question 16
L1ET-AS05-ME0011-1604
Martin Wagner is an associate analyst at Kinder & Wexler. He is part of a research team
preparing a report on Axle Industries. After analyzing all the relevant information,
Wagner feels that the team should issue a sell recommendation. However, the other two
members of his team are less pessimistic about the stock's prospects and complete the
report with a hold recommendation. The firm's equity research committee reviews the
report and supports the hold rating. Wagner's best course of action is to:
a) refuse to put his name on the report until the rating is changed to sell.
b) insist that his dissenting opinion be added to the report before publication.
c) allow his name on the report after noting his dissenting opinion in the
working papers.
Question 17
L1ET-MS05-ME0011-1604
Patrick Evans is a portfolio manager. He recently set up a website with a discussion
forum that allows his clients to ask questions that can be answered by him, his assistant,
or other clients who join the forum. Access to the forum is restricted to registered users,
which are limited to Evans's clients with credentials provided by his assistant. In the
invitation to the forum, Evans includes a description of the forum and cautions that
other users can view public postings. One of his clients posted a question that included a
copy of his recent statement. He was addressing Evans alone, but the post was viewable
by all users. Evans had his assistant remove the post as soon as he spotted it. Did Evans
violate the Standards of Professional Conduct?
 a) No.
b) Yes, because he did not provide safeguards against the disclosure of
confidential information.
c) Yes, because he should have anticipated accidental disclosures and avoided
them.
Question 18
L1ET-MS05-ME0012-1604
Victor Chang is the head of derivatives trading at Kang Bank. He led a firm-wide effort to
upgrade computer systems to monitor derivatives trading and continuously assess the
bank's risk exposure. The firm has extensive procedures in place to monitor and control
trading. Chang's former assistant, Lonnie Sung, was promoted and now works as a
derivatives trader at the bank under the futures trading manager. Sung uses his
familiarity with the compliance systems to execute unauthorized trades. His trading was
discovered after substantial losses for both the bank and several client accounts. Did
Chang violate the Standards of Professional Conduct?
a) Yes.
b) No, because he delegated supervision to the futures manager.
c) No, because he implemented a reasonable compliance system.
Question 19
L1ET-AS05-ME0013-1702
Roger Parks is an analyst with Delta Partners, a large firm offering sell-side research
and investment banking services. In lieu of certain fees, the firm often accepts stock
options on the firms it underwrites. As a partner of the firm, Parks is eligible for an
allocation of those options to his personal account. The general partner called Parks to
remind him that Delta's options in Interworks will expire in a few weeks and suggests
that he write a research report highlighting the stock's upside potential. According to
the Standards of Professional Conduct, Parks may:
a) not write the report due to the conflict of interest.
b) write the report if he discloses the firm's investment banking relationship.
c) write the report if he discloses details of both his and the firm's option
holdings.
Question 20
L1ET-MS05-ME0013-1604
Monica Stetz is an investment analyst with Kline & Powers, a small advisory firm
consisting of the president, CFO, and Stetz. Her personal portfolio includes shares in
Petwise, Inc. The president informs her that Kline will initiate coverage on Petwise and
asks her to write a research report on the stock. After disclosing her ownership to the
president, she is instructed to sell her shares immediately to remove the conflict and
then write the report. Stetz sells her shares and subsequently initiates coverage of
Petwise with an unqualified sell recommendation. Did Stetz violate the Standards of
Professional Conduct?
 a) No.
b) Yes, by initiating coverage with a sell recommendation.
c) Yes, by creating the appearance of a conflict of interest.
Question 21
L1ET-AS05-ME0014_2212
John Randall is a money manager with Insight Asset Managers (IAM). IAM sponsors
luncheons for individual investors where firms present proposals to raise capital. A
small-cap biotech firm, Diamond Diagnostics, presented a promising new technology
that could drive the stock price up dramatically over the next year.
Two of Randall's clients expressed interest in adding the stock to their portfolios. One
client, Margret Burns, is a retiree living on a modest pension supplemented by a mainly
income-producing portfolio. She is identified as risk-averse in her investment policy
statement. The other, Richard Webber, is a wealthy entrepreneur with an aggressively
invested portfolio and is identified as risk tolerant in his investment policy statement.
Randall believes the upside potential for Diamond is genuine. To comply with the Code
and Standards, Randall may make a recommendation to invest in this stock to:
a) either Burns or Webber.
b) Burns but not Webber.
c) Webber but not Burns.
Question 22
L1ET-MS05-ME0014_2212
Pedro Martinez is a portfolio manager with Sol Bank. The bank offers asset management
services and proprietary products to institutional clients. Martinez occasionally attends
meetings to support the sales team with technical expertise. His bonus is, in part,
determined by the success of these sales meetings. In addition, he receives a
commission on each sale of the bank's proprietary products. According to the Standards
of Professional Conduct, Martinez must disclose the additional compensation he
receives from:
a) sales meetings but not proprietary products.
b) proprietary products but not sales meetings.
c) both sales meetings and proprietary products.
Question 23
L1ET-AS05-ME0015-1604
Which of the following portfolios is least likely to be included in a composite for a GIPS-
compliant performance presentation?
a) A charitable portfolio managed without being charged fees
b) A portfolio dedicated to investing exclusively in real estate
c) A portfolio that was terminated at the end of the last period
Question 24
L1ET-AS05-ME0016_2212
Simon Rush is a broker with FMS Investments. He is preparing a list of stock
recommendations for one of his clients. He gathers several reports from his firm's
research department and carefully reads each one. After selecting the most suitable
stocks, Rush adds his own commentary and sends the recommendations with the
reports to his client. Rush:
a) violated the Standards by using secondary research and by adding his own
commentary.
b) violated the Standards by using secondary research but not by adding his own
commentary.
c) did not violate the Standards by using in-house research or adding his own
commentary.
Question 25
L1ET-MS05-ME0016-1604
Wilma Flint is an investment advisor in the United States. She recently met with a
wealthy resident of an Eastern European country who would like to employ her
services. The European country's securities regulations require all investment advisors
to register with the local governing agency before soliciting business or providing
services to its residents. Unaware of the law, Flint issues a service agreement to her new
client and accepts an initial payment to fund the account without a proper registration.
Did Flint violate the Standards of Professional Conduct?
a) Yes, because she should have been aware of the European country's laws.
b) No, because the Code and Standards do not address registration.
c) No, because she did not knowingly violate any laws.
Question 26
L1ET-AS05-ME0017-1604
Roger Hamlet works at the trading desk of Tradex, a firm that provides clearing services
to small brokerage firms. Hamlet receives notification from the designated person at
CFA Institute's Professional Conduct Program (PCP) that one of his clients, Jack Russell,
has been accused of churning accounts in order to generate excessive fees. The notice
requests that Hamlet provide Russell's trading records to the investigation. Hamlet's
best course of action is to:
a) refuse to provide records to the PCP.
b) alert other clients to the accusations.
c) cooperate with the PCP investigation.
Question 27
L1ET-MS05-ME0017-2201
Wendy Wells, CFA, is a portfolio manager with Bergan Financial Services. Her
supervisor asked her to provide general descriptions of some basic financial concepts
for the “investor education” section of the firm's website. After searching the Internet,
Wells finds several sources with very similar generic descriptions of diversification,
risk, asset allocation, and other terminology. In completing her assignment,
Wells's best course of action is to:
a) copy the descriptions verbatim and cite “the Internet” as her source.
b) rewrite the text in her own words and cite each website source.
c) rewrite the text in her own words without citing each website source.
Question 28
L1ET-AS05-ME0018_2212
Linda Lane manages the domestic equity portfolio for L&L Asset Managers. L&L uses a
six-factor model to rank stocks and select securities. Lane found that the model could be
improved by replacing some variables in the model with other variables. She did not
notify clients of these changes. Did Lane violate the Standards of Professional Conduct?
a) No.
b) Yes, because she made a material change to her investment approach without
notifying clients.
c) Yes, because she failed to follow the investment mandate of her fund.
Question 29
L1ET-MS05-ME0018_2212
Shannon Waxman is the director of research for a large investment company. She is an
avid reader of online investment research and commentary. When she posts comments
to other authors' articles, she does so under her anonymous username, “InvestrCFA.”
When she writes articles for her company blog, she posts under her real name,
“Shannon Waxman, CFA.” According to the Standards of Professional Conduct, Waxman
violated the Standards by:
a) posting comments to others' work anonymously.
b) incorporating “CFA” into her anonymous username.
c) including the CFA designation in her own blog articles.
Question 30
L1QM-AS05-ME0019_2212
An analyst estimates that a company's earnings could range from ¥2.2 billion to ¥2.8
billion and that any level of earnings between these two earnings estimates are equally
likely. Using a continuous uniform distribution, what is the probability that the next
year's earnings will be greater than or equal to ¥2.68 billion?
a) 7%
b) 20%
c) 37%
Question 31
L1QM-MS05-ME0020_2212
An investment pays the holder $30 quarterly payments over seven years. If the quoted
price is $729.49, the stated annual yield is closest to:
 a) 0.65%.
b) 1.00%.
c) 1.64%.
Question 32
L1QM-AS05-ME0022_2212
An analyst is using a hypothesis test concerning a population mean (μ). The null and
alternative hypotheses for the test are:

The analyst is using a t-test and included an excerpt of Student's t-distribution in the
table below:
Student's t-Distribution (One-Tailed Probabilities)
Df p = 0.10 p = 0.05 p = 0.025 p = 0.01 p = 0.005
38 1.304 1.686 2.024 2.429 2.712
39 1.303 1.685 2.023 2.426 2.708
40 1.303 1.684 2.021 2.423 2.704
41 1.302 1.683 2.020 2.421 2.701
42 1.302 1.682 2.018 2.418 2.698
The sample size (n) is 39 and the alpha (α) is 0.10. For this hypothesis test, the
acceptance point or range is closest to:
a) t = 1.304.
b) t < −1.304 and t > 1.304.
c) t < −1.686 and t > 1.686.
Question 33
L1QM-MS05-ME0022-1702
A sample size of 40 is drawn from a normally distributed population. Which of the
following is the appropriate test and degrees of freedom to determine whether the
sample exhibits a specific variance?
a) A t-statistic with 39 degrees of freedom
b) A chi-square (χ2) with 38 degrees of freedom
c) A chi-square (χ2) with 39 degrees of freedom
Question 34
L1QM-MS05-ME0023_2212
An analyst gathered risk premium data and summarized it in the following table:
Interval Absolute Relative Cumulative Relative
Endpoints Frequency Frequency Frequency
4.50% 60 60% 60%
8.25% 22 22% 82%
12.00% 13 13% 95%
 Interval Absolute Relative Cumulative Relative
Endpoints Frequency Frequency Frequency
15.75% 5 5% 100%
Assuming that risk premia are normally distributed, the analyst would most likely
conclude that this data set is:
a) normally distributed.
b) positively skewed.
c) negatively skewed.
Question 35
L1QM-MS05-ME0024_2212
A reporting service indicates that the following historical performance occurred:
Monthly Data: January 2002 to December 2005
Mean Return (%) Standard Deviation (%) Sharpe Ratio
Small-cap value funds 1.25 2.34 0.410
An analyst wants to determine the probability that small-cap value funds will earn a
monthly return lower than the monthly risk-free rate of 0.29%. He is basing his
estimate of future-period monthly return parameters on the sample mean and standard
deviation provided in the table above and has assumed that the fund returns represent
a normal distribution. Excerpts from the table of the cumulative standard distribution
function for the standard normal probability is included below:
x or z 0 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09
−0.30 0.3821 0.3783 0.3745 0.3707 0.3669 0.3632 0.3594 0.3557 0.3520 0.3483
−0.40 0.3446 0.3409 0.3372 0.3336 0.3300 0.3264 0.3228 0.3192 0.3156 0.3121
−0.50 0.3085 0.3050 0.3015 0.2981 0.2946 0.2912 0.2877 0.2843 0.2810 0.2776

0.30 0.6179 0.6217 0.6255 0.6293 0.6331 0.6368 0.6406 0.6443 0.6480 0.6517
0.40 0.6554 0.6591 0.6628 0.6664 0.6700 0.6736 0.6772 0.6808 0.6844 0.6879
0.50 0.6915 0.6950 0.6985 0.7019 0.7054 0.7088 0.7123 0.7157 0.7190 0.7224
The probability that the small-cap value fund return is below the risk-free rate of return
is closest to:
a) 34%.
b) 41%.
c) 66%.
Question 36
L1QM-AS05-ME0025_2212
Assume that quarterly returns are normally distributed and that the population mean
and standard deviation are unknown. A random sample of 17 quarterly returns had a
mean of 1.5% and a standard deviation of 6.5%. Table 2 below is an excerpt from
Student's t-distribution. Table 2: Student's t-Distribution (One-Tailed Probabilities)
 Df p = 0.10 p = 0.05 p = 0.025 p = 0.01 p = 0.005
14 1.345 1.761 2.145 2.624 2.977
15 1.341 1.753 2.131 2.602 2.947
16 1.337 1.746 2.120 2.583 2.921
17 1.333 1.740 2.110 2.567 2.898
18 1.330 1.734 2.101 2.552 2.878
The 95% confidence interval for the population mean of quarterly returns is closest to
a) −1.25% to 4.25%.
b) −1.84% to 4.84%.
c) −1.94% to 4.94%.
Question 37
L1QM-MS05-ME0025-1604
A junior associate is assigned the task of analyzing a bank's customer account mix. He is
presented with the following data:
Account Column A Ratio of Account Column B Ratio of Account Type to
Type Type to Bank Customers Total Open Accounts at the Bank
Checking 0.70 0.45
Saving 0.35 0.23
Loans 0.50 0.32
Based solely on the information provided, which of the following
statements best describes the data presented in the table?
a) Column A is mutually exclusive and collectively exhaustive.
b) Column B is mutually exclusive and collectively exhaustive.
c) Column A is mutually exclusive but not collectively exhaustive.
Question 38
L1QM-AS05-ME0026-2201
A trader has two limit orders in place for each of two stocks, Iridium (IRDM) and
Verizon (VZ). She estimates that the probability of the IRDM trade executing before the
end of the day is 0.50. However, there is only a 15% chance that the VZ trade will
execute over the same period. If the probability of both trades executing before the
close is 0.09, what is the probability that either one or the other will execute?
a) 65%
b) 56%
c) 33%
Question 39
L1QM-MS05-ME0026-2201
A company is known for engaging in numerous restructurings, which involve taking
“one-time” charges. An analyst determines that in the past 10 years, the company has
restructured four times and not restructured six times. Assuming this pattern will
continue in the future, the analyst wants to determine the probability that the company
will restructure exactly twice in the next 10 years. Based on the data provided, the
analyst should conclude that this probability is closest to:
a) 1%.
b) 12%.
c) 20%.
Question 40
L1QM-MS05-ME0027-2201
Assume the corporate bond spread over Treasuries is normally distributed with a
population mean of 2.0% and a population standard deviation of 8.0%. Over the past six
years, the corporate bond spread over Treasuries has averaged 5.0%. An analyst
considers this to be highly unusual and wants to determine whether the recent result is
likely 90% of the time, given the population's statistics. The confidence interval around
the population mean that the analyst will calculate is closest to:
a) −4.4% to 8.4%.
b) −3.4% to 7.4%.
c) −0.2% to 4.2%.
Question 41
L1QM-AS05-ME0029-2201
A merger arbitrage hedge fund manager is considering using a scoring model to test the
likelihood that a merger deal will close within six months. Back-testing the model
produced the following results:

• P(Closed on time) = 0.70

The manager uses the model to score a new deal. If the deal fails the scoring test, what is
the updated probability that it will not close within six months?
a) P(no close | failed) = 0.245
b) P(no close | failed) = 0.475
c) P(no close | failed) = 0.705
Question 42
L1QM-MS05-ME0029_2212
Ty Kepler is a pension fund manager. He utilizes the services of several portfolio
managers to handle the equity, fixed-income, and real estate segments of the fund.
However, Kepler makes all the allocation and rebalancing decisions. As the fund
manager, he must periodically evaluate the portfolio managers to determine when a
change is to be made. He gathered the following performance data on his current roster:
Manager Time-Weighted Money-Weighted Benchmark
Red 5.6% 7.2% 7.2%
White 8.2% 7.4% 8.0%
 Manager Time-Weighted Money-Weighted Benchmark
Blue 6.5% 4.5% 5.6%
Based only on the information provided, which manager should Kepler consider
replacing?
a) Red
b) White
c) Blue
Question 43
L1QM-AS05-ME0031-2201
Balance sheet and income statement data denominated in Indian rupees would best be
described as:
a) ratio-scaled.
b) ordinal-scaled.
c) nominal-scaled.
Question 44
L1QM-MS05-ME0032-2212
Standard error of the estimate, se, would least likely be described as:
a) the square root of sum of the squared errors (SSE).
b) a goodness-of-fit measure for the estimated regression line.
c) an absolute measure of the distance of the observed dependent variable from
the regression line.
Question 45
L1EC-AS05-ME0033-2201
Monetarists attribute the primary cause of the business cycle to:
a) exogenous shocks and government intervention.
b) disequilibrium in the labor markets.
c) shifts in aggregate supply.
Question 46
L1QM-MS05-ME0033-2201
An investor uses a stock screener to identify stocks on which to perform a more in-
depth analysis. The first criterion limited the result to dividend-paying stocks, which
eliminated 35% of the stocks in the investment universe. The second criterion looked
for stocks that trade at less than three times book value, leaving only 0.50% of the total
universe that passed both criteria. The probability that a stock from this investment
universe trades at less than three times book value, given that it pays a dividend
is closest to:
a) 0.77%.
b) 15.0%.
 c) 43.0%.
Question 47
L1EC-AS05-ME0034-1702
If a firm is able to increase output while reducing its costs of inputs, it is experiencing:
a) constant returns to scale.
b) diseconomies of scale.
c) economies of scale.
Question 48
L1EC-MS05-ME0034-1702
The spot rate for a currency exchange rate is 1.5865 and the six-month forward rate is
1.6500. The six-month forward points are closest to:
a) 0.0635
b) −0.0635
c) 635
Question 49
L1EC-AS05-ME0035-1604
According to the Fisher effect:
a) a change in the expected inflation rate causes the real rate to rise.
b) the nominal rate of interest plus the expected inflation rate is equal to the real
rate of interest.
c) changes in inflation expectations cause the nominal rate of interest to change.
Question 50
L1EC-AS05-ME0036-1604
Over the last year the USD has depreciated 15% relative to the GBP. How much has the
GBP appreciated relative to the USD?
a) Exactly 15%
b) Less than 15%
c) Greater than 15%
Question 51
L1EC-MS05-ME0036_2212
In the long run, a firm under perfect competition will:
a) have economic profit that exceeds accounting profit.
b) reach a point where accounting profit is equal to economic profit.
c) have zero economic profit.
Question 52
L1EC-AS05-ME0037-2201
Unemployed workers at the business cycle peak will most likely be:
 a) Discouraged workers.
b) Long-term unemployed.
c) Frictionally unemployed.
Question 53
L1EC-MS05-ME0037-1604
When a central bank sells government bonds to commercial banks, it is likely:
a) increasing broad money supply.
b) reducing the reserves of commercial banks.
c) entering into a repurchase agreement.
Question 54
L1EC-MS05-ME0038_2212
In a Keynesian model, a cut in government spending and commensurate reduction in tax
burden would shift the:
a) IS and LM curves.
b) IS and aggregate demand curves.
c) LM and aggregate demand curves.
Question 55
L1EC-AS05-ME0039_2212
The inventory/sales ratio is most likely to be falling:
a) at the bottom of an early expansion.
b) during the middle of an expansion.
c) at the end of an economic expansion.
Question 56
L1EC-MS05-ME0039-1702
Given the following demand function:

where the quantity demanded is of good x, Py is the price of good y, and I is the
consumer's income, then the relationship between good y and good x is such that they
are:
a) complements.
b) substitutes.
c) independent.
Question 57
L1EC-AS05-ME0040-1702
Negative cross-price elasticity is indicative of:
 a) complements.
b) substitutes.
c) a decrease in income.
Question 58
L1EC-MS05-ME0040-1604
A country enjoys a comparative advantage in producing a good if:
a) it can produce more of a good at a lower cost than anyone else.
b) its labor costs are lower than those of its competitors.
c) its opportunity costs are lower than those of its competitors.
Question 59
L1EC-MS05-ME0041_2212
What is the most likely reason for an increase in money demand?
a) Real GDP is falling.
b) Consumers are making fewer transactions.
c) Interest rates on bonds are low.
Question 60
L1EC-AS05-ME0042-1604
Purchasing bonds in open market operations is most likely an example of which type of
monetary policy?
a) Expansionary
b) Contractionary
c) Target independent
Question 61
L1EC-MS05-ME0042-1604
An economist is evaluating the competitive market structure of a particular industry. He
computes the Herfindahl-Hirschman Index (HHI) to be 0.0125. That is equivalent to
how many firms with equal market shares?
a) 5 firms
b) 80 firms
c) 120 firms
Question 62
L1EC-AS05-ME0043-1604
Which of the following market structures is least likely to observe nonprice competition
among its sellers?
a) Oligopoly
b) Monopolistically competitive
c) Perfectly competitive
Question 63
L1EC-MS05-ME0043-1604
A central bank in a developed economy is least likely to use which monetary policy tool?
a) Open market operations
b) The central bank's policy rate
c) Reserve requirements
Question 64
L1FR-MS05-ME0046_2212
Theo, Inc. had an average number of days of inventory on hand of 12 in the most recent
year. The company wants to increase the amount of inventory on hand to avoid missing
out on potential sales. Theo has determined that its days of inventory on hand for the
next fiscal year should match the industry average of 18 days. The company's cost of
sales for the most recent fiscal year was a total of $2,324 million, and Theo expects cost
of sales to increase 10% in the next fiscal year. To achieve the company's goal of
increasing its number of days of inventory on hand, the change in the average inventory
balance that must occur is closest to:
a) $40 million.
b) $45 million.
c) $50 million.
Question 65
L1FR-AS05-ME0047_2212
An analyst has gathered the following three years of data (in £ millions) for a company:
20X3 20X2 20X1
Select Data from Income Statements
Revenue 800 770 700
Earnings before taxes and interest (EBIT) 80 75 67
Interest expense (paid) 11 10 10
Taxes 19 20 17
Profit for year 50 45 40
Select Data from Balance Sheets
Total current assets 300 250 200
Fixed assets, net 600 570 560
Short-term debt 100 100 100
Total current liabilities (including short-term debt) 330 315 305
Long-term debt 120 105 100
Equity 450 400 355
Total liabilities and equity 900 820 760
In addition to the data above, the analyst has estimated that the company's total annual
cash expenditures for 20X3, 20X2, and 20X1 were £550, £520, and £480 million,
respectively.
Comparing 20X3 with 20X2, the most reasonable conclusion an analyst might make
about the company's profitability is that it:
a) improved, as indicated by the gross profit margin rising from 9.7% in 20X2 to
10% in 20X3.
b) deteriorated, as indicated by the return on equity falling from 11.92% in 20X2
to 11.76% in 20X3.
c) deteriorated, as indicated by the return on equity falling from 12.68% in 20X2
to 12.50% in 20X3.
Question 66
L1FR-MS05-ME0047-1702
A financial analyst at Kingston Semiconductor, an Irish firm, is computing the
depreciation expense of a piece of manufacturing equipment for the fiscal year ended
December 31, 2008. The equipment was acquired on January 1, 2008. The analyst
discovers the following information (currency in euros):
Cost of the equipment €4,800,000
Estimated residual value €1,000,000
Expected useful life 7 years
Total productive capacity 4,000,000 units
Production in FY 2008 275,000 units
Expected production for next six years 3,725,000 units total
If Kingston uses the double-declining depreciation method, the amount of depreciation
expense on Kingston's income statement is closest to:
a) €1,085,714.
b) €1,371,429.
c) €1,657,143.
Question 67
L1FR-AS05-ME0048-1604
Which of the following is least likely to be a consideration that a company would make
when managing its liquidity?
a) Maintaining enough cash and other liquid assets to ensure that it can meet
capital expenditures
b) Avoiding excessive amounts of cash because the return on cash is less than the
company's cost of capital to finance its assets
c) Accumulating cash that will be used for acquisitions
Question 68
L1FR-MS05-ME0048_2212
A conservative accounting choice is most likely to:
a) be neutral.
b) increase reported earnings.
 c) decrease reported earnings.
Question 69
L1FR-AS05-ME0049_2212
Martin Stores adheres to IFRS. In 2011 the net realizable value of its inventory was
below cost and the value of inventory was written down by €0.3 million. In 2012, the
company reversed the entire amount of the write-down. Martin Stores,' CFO calculated
the financial ratios of the company with and without the write-down. If the write-down
had not occurred, Martin Stores reported 2011:
a) gross profit margin would have been higher.
b) inventory turnover ratio would have been higher.
c) number of days of inventory on hand would have been lower.
Question 70
L1FR-MS05-ME0052_2212
Which of the following would least likely be considered a non-financial risk?
a) Being sued by a client
b) Extreme and adverse events occurring more often than predicted
c) A substantial and adverse movement in price when trying to sell an
investment
Question 71
L1FR-AS05-ME0053-1604
A company's fixed charge coverage can help an analyst determine the company's ability
to cover its:
a) daily cash expenditures.
b) required return on equity.
c) lease and interest payments.
Question 72
L1FR-MS05-ME0053-1702
Runway, a fashion clothing company, reported annual revenue of $500 million, total
expenses of $100 million, and net income of $20 million. If accounts receivable
increased by $25 million, how much cash did the company receive from its customers?
a) $500 million
b) $475 million
c) Nothing; the company is owed $5 million
Question 73
L1FR-AS05-ME0054-1604
What type of audit opinion is preferred when analyzing financial statements?
a) Qualified
b) Superior
 c) Unqualified
Question 74
L1FR-MS05-ME0054-1604
SmashToys purchases and distributes SquishBalls. At the start of Year 1, SmashToys had
no inventory on hand. It purchased 70,000 units at $3 and sold 55,000 of them for
$5.75. In Year 2, SmashToys purchased 100,000 additional units and received a bulk
discount rate of $2.85. In Year 2, the company sold 80,000 units at the same price of
$5.75. The company uses the weighted average cost method to value its inventory. The
gross profit margin for Year 2 is closest to:
a) 47.8%.
b) 50.1%.
c) 50.4%.
Question 75
L1FR-AS05-ME0056-0220
Which of the following is most likely to be a key criticism of “robo-advisory” services?
a) Loss of jobs for human practitioners
b) Potential failure during normal market conditions
c) Lack of transparency and rationale around recommendations
Question 76
L1FR-AS05-ME0057-1604
PLC Inc. paid $24,000 of cash to a real estate company upon signing a lease on
December 31, 2012. The payment represents an $8,000 security deposit and $8,000 of
rent for each of January 2013 and February 2013. Assuming that both January and
February rent are correctly reflected as prepaid, the most likely effect on PLC's
accounting equation in December 2012 is:
a) No net change in assets.
b) A decrease in assets of $16,000.
c) A decrease in assets of $24,000.
Question 77
L1FR-AS05-ME0058-1604
Magic Prizes purchases and distributes magic wands. At the start of 2010, Magic Prizes
had no inventory on hand. It purchased 70,000 units at $3 and sold 55,000 of them for
$5.75. In the following year, Magic Prizes purchased 100,000 additional units and
received a bulk discount rate of $2.85. In 2011 the company sold 80,000 units at the
same price of $5.75. The company uses the FIFO method to value its inventory. In 2011,
the company's ending inventory balance is closest to:
a) $99,750.
b) $100,435.
c) $102,000.
Question 78
L1FR-MS05-ME0058-1604
Use the following selected financial information for Polymath Steel to answer the
question that follows the data:
20X2 ($000s) 20X1 ($000s)
Pretax income (13,366) 41,440
Income tax expense 15,668 21,516
Net income (29,034) 19,924
Deferred tax items
Net operating loss carryforward 14,807 6,690
Other tax assets 9,025 11,894
Subtotal 23,832 18,584
Valuation allowance (22,131) (3,688)
Net deferred tax assets 1,701 14,896
Total deferred tax liabilities (4,537) (1,337)
Net deferred tax asset (liability) (2,836) 13,559
If Polymath offsets all of its deferred tax assets each year with a valuation allowance,
what would be the adjusted income tax expense in 20X2?
a) $5,848
b) $17,369
c) $19,122
Question 79
L1FR-AS05-ME0059-1604
A decomposition of a company's ROE is as follows:
FY13 FY12
ROE 14.5% 14.5%
Tax burden 0.71 0.71
Interest burden 0.95 0.90
EBIT margin 8.9% 9.0%
Asset turnover 2.10 2.10
Leverage 1.15 1.20
Based only on this ROE decomposition, an analyst might conclude that in FY13 the:
a) net profit margin increased, while leverage declined.
b) net profit margin declined, while leverage increased.
c) increase in interest costs was offset by the increase in leverage.
Question 80
L1FR-MS05-ME0059-1604
Banff Brothers just acquired a new smelter for their business. The purchase price was
$20,000, delivery charges were $4,500, and installation cost $2,500. In addition, Banff
spent $4,000 on training employees how to use the smelter. How much should be
recognized on Banff's balance sheet?
a) $24,500
b) $27,000
c) $31,000
Question 81
L1FR-MS05-ME0060-1702
At a recent trade show, three purchasing managers placed an order for the new Turbo
8000. At the end of the machine's first year in use, each of their accounting managers
discussed with them the machine's estimated useful life. Which of the following
accounting treatments is the least conservative approach for calculating the assets'
depreciation expense for the first year in use?
a) Company A used the straight-line method with a useful life of eight years.
b) Company B used the straight-line method with a useful life of five years.
c) Company C used the double-declining-balance method with a useful life of
eight years.
Question 82
L1FR-AS05-ME0062-1604
Juicy Jumpers reported interest expense of $9 million and taxes of $5 million. If the
interest payable account increased by $2 million and taxes payable decreased by $3
million, how much cash did the company pay for interest and taxes?
a) $7 million in interest and $8 million in taxes
b) $9 million in interest and $5 million in taxes
c) $11 million in interest and $3 million in taxes
Question 83
L1FR-AS05-ME0064_2212
An analyst is evaluating the balance sheet of a U.S. company that uses last in, first out
(LIFO) accounting for inventory. The analyst collects the following data:
Dec 31, X5 Dec 31, X6
Inventory reported on balance sheet $1,000,000 $1,200,000
LIFO reserve $100,000 $140,000
Average tax rate 30% 30%
After adjusting the amounts to convert to the first in, first out (FIFO) method, inventory
at December 31, 20X6, would be closest to:
a) $1,200,000.
b) $1,240,000.
c) $1,340,000.
Question 84
L1FR-MS05-ME0064_2212
Conversion of a convertible bond to equity would be reported as:
a) an investing cash inflow and outflow.
b) financing cash outflow and inflow.
c) a supplemental disclosure to the cash flow statement.
Question 85
L1FR-AS05-ME0065-1604
Preferred shares with mandatory redemption at a fixed amount at a future date are
classified as a(n):
a) asset.
b) liability.
c) equity.
Question 86
L1FR-MS05-ME0065-1604
Companies A, B, and C are new entrants in the same industry competing against one
another. Details of their purchases and inventory valuation methods are listed below.
Units Purchased Quarterly Inventory Valuation Method Used
Company A 30,000 FIFO
Company B 10,000 Weighted average cost method
Company C 16,000 LIFO
If industry supply prices steadily increased throughout the year, which company
will most likely have the highest inventory turnover ratio?
a) Company A
b) Company B
c) Company C
Question 87
L1FR-MS05-ME0066-1702
An analyst has collected the following information regarding a company in advance of
its year-end earnings announcement (in millions):
Estimated net income $400
Beginning retained earnings $2,400
Estimated distribution to owners $200
The analyst's estimate of ending retained earnings (in millions) should be closest to:
a) $2,600.
b) $3,000.
c) $3,400.
Question 88
L1FR-MS05-ME0068-0220
Distributed ledger technologies might be able to reduce costs by:
a) Generating automatic trading systems and programs.
b) Allowing transactions without the need for a third party.
c) Performing tasks that would otherwise involve human intervention
and analysis.
Question 89
L1FR-AS05-ME0068-1604
A company has one customer (X-INP Corp) that accounted for over 30% of the
company's accounts receivable balance at the start of 20X3. No sales were made to X-
INP Corp in 20X3 and no payments were received from X-INP. Furthermore, during
20X3, X-INP filed for bankruptcy and defaulted on all amounts it owed to creditors. As a
result, the company determined that it would never receive payment on the amount it
was due and wrote off X-INP's receivable balance as a bad debt just before the fiscal
20X3 year end. If the write-off had not occurred, days sales outstanding for 20X3
would most likely be:
a) lower.
b) higher.
c) the same.
Question 90
L1FR-AS05-ME0067_2212
A company wishing to increase earnings in future periods would least likely:
a) impair property, plant, and equipment.
b) raise estimates of uncollectible accounts receivables.
c) capitalize rather than expense a purchase.