CFA Flash Cards Exam 33 Questions with Answers
Types of scales in order of least to most precision. - CORRECT ANSWER NOIR - Nominal, Ordinal, Interval, Ratio
Parameter - CORRECT ANSWER A measure used to describ
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CFA Flash Cards Exam 33 Questions with Answers
Types of scales in order of least to most precision. - CORRECT ANSWER NOIR - Nominal, Ordinal, Interval, Ratio
Parameter - CORRECT ANSWER A measure used to describe a characteristic of a population.
Frequency distribution - CORRECT ANSWER Tabular presentation of statistical data. fancy way of saying a table of data.
Interval - CORRECT ANSWER Using a return interval of 1% would result in 69 separate intervals. The interval with the greatest frequency is the modal interval.
Relative Frequency - CORRECT ANSWER Calculated by dividing the absolute frequency of each return interval by the total number of observations.
Absolute Frequency AKA Frequency - CORRECT ANSWER The actual number of observations that fall within a given interval.
Relative Absolute Frequencies AKA Relative Frequency - CORRECT ANSWER Graph or chart that shows the data in comparison to other data. Finger shaped.
Cumulative Relative Frequency - CORRECT ANSWER Graph or chart that shows the data incorporating other data into results. Incline shaped.
Histogram - CORRECT ANSWER Graphical presentation of the absolute frequency distribution. Intervals on horizontal axis and absolute frequencies are scaled on the vertical axis.
Frequency polygon - CORRECT ANSWER Midpoint of each interval plotted on the horizontal axis and the absolute frequency for that interval is plotted on the vertical axis. Each point is connected on a straight line.
Measures of central tendency - CORRECT ANSWER Identify the center or average of a data set. This central point can be used to represent typical or expected value in the data set.
Central tendency is the measure of reward. - CORRECT ANSWER Dispersion is a measure of risk.9
Range - CORRECT ANSWER Distance between the largest and the smallest value in the data set.
Dispersion - CORRECT ANSWER Variability around the central tendency.
Phil Lich, CFA, has an anonymous social media account with the user name "CFAcharterholder." Lich wishes to enhance the market's perception of the price impact of his recommendations. He posts a message on the social media network that says, "Well-known analyst upgrading SmithCo today?" and later that day emails a research report to all his clients upgrading his recommendation on SmithCo to "Buy." Lich has most likely violated the Standards on:
A) fair dealing and market manipulation.
B) fair dealing and use of the CFA designation.
C) market manipulation and use of the CFA designation. - CORRECT ANSWER C) market manipulation and use of the CFA designation.
Using the CFA designation in a fictitious name that conceals the owner's identity is a violation of Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program. Because the social media message is intended to induce trading in a security, it is a violation of Standard II(B) Market Manipulation. Posting the message does not violate Standard III(B) Fair Dealing because it does not favor some clients' interests over others.
While at dinner a member overhears a well-known and influential analyst from a different firm tell his companion that he will be raising his recommendation on Tree Products from hold to buy when he appears on a morning talk show the next day. Before the broadcast, the member buys 1,000 shares of Tree Products for her own account. The member has violated the Standard relating to:
A) fair dealing.
B) diligence and reasonable basis.
C) material nonpublic information. - CORRECT ANSWER C) material nonpublic information.
A change in investment recommendation by a well-known and influential analyst is likely to affect the market price and is considered material information, so acting on this information before it has been released is prohibited by Standard II(A) Material Nonpublic Information. Because the member does not work for the analyst's firm, this is not addressed by Standard III(B) Fair Dealing. Having a reasonable basis does not apply to a member's own personal trades.
Allen Winkler, CFA, recently had lunch with Kim Thompson, a former professor of his, who told him of a new valuation model she had developed. Winkler recreated Thompson's model with some revisions and back-tested it using data provided by Standard & Poor's (S&P) with impressive results. Winkler's firm launches a mutual fund based on the revised model, and Winkler provides a discussion of the principles underlying the model and the test results. Is Winkler required to credit Thompson for having developed the model and S&P as the source of the data?
A) Both of these sources must be cited.
B) Neither of these sources must be cited.
C) Only one of these sources must be cited. - CORRECT ANSWER C) Only one of these sources must be cited.
Under Standard I(C) Misrepresentation, Winkler must identify Thompson as having developed the original model to avoid the prohibition against plagiarism. The only permitted exception is using factual information published by recognized financial and statistical reporting services such as S&P.
Donald Smith, CFA, has been assigned by his employer to write a report for clients on Braden Corporation. Smith has 1,000 shares of Braden that he bought three years ago and has been discussing a consulting contract with Braden to write guidelines for their investor relations department. If Smith writes the report on Braden Corporation, he must disclose within the report:
A) both his ownership of Braden shares and his prospective consulting work.
B) and to his employer his prospective consulting work but not his ownership of Braden shares.
C) his ownership of Braden shares but need only disclose his prospective consulting work to his employer. - CORRECT ANSWER A) both his ownership of Braden shares and his prospective consulting work.
Both ownership of Braden stock and the possible consulting work present potential conflicts of interest for Smith and must be disclosed within the report to comply with Standard VI(A) Disclosure of Conflicts.
Fran Lester, CFA, works for a broker based in a country in which participation in any IPO is permitted with her employer's permission. She lives and works in a country that has no restrictions on her participation in IPOs. If Lester's firm is distributing shares of an oversubscribed IPO through the office Lester works in, can Lester receive shares in the IPO?
A) No, not under any circumstances.
B) Yes, but she must obtain permission from her employer.
C) Yes, because the applicable law is that of her home country. - CORRECT ANSWER A) No, not under any circumstances.
Standard I(A) Knowledge of the Law requires members and candidates to comply with the strictest requirement among the law where they reside, the law in the area where they do business, and the Code and Standards. In this case, the Code and Standards is the strictest. Standard III(B) Fair Dealing prohibits members and candidates from withholding shares in oversubscribed IPOs from clients for their own benefit.
Diane Harris, a CFA Institute member, is a portfolio manager for Worldwide Investments. One of her clients has offered her the use of his condominium in Hawaii if the returns on his U.S. equities account beat their benchmark on a risk-adjusted basis. Harris informed her manager of all terms of this agreement in writing and received verbal consent to the arrangement before accepting the offer. Did Harris violate the Standards?
A) Yes, because written consent from her employer is required.
B) No, because bonuses from clients for doing her job well do not create a conflict of interest.
C) No, because Harris notified and received verbal consent from her employer to enter the arrangement. - CORRECT ANSWER A) Yes, because written consent from her employer is required.
Standard IV(B) Additional Compensation Arrangements requires that members and candidates obtain written consent from their employers to enter into the agreement for additional contingent compensation from a client. Harris only received verbal consent. The concern is that such an arrangement might induce Harris to give partiality to this client's portfolio over those of her other clients.
American Securities wants to prepare a GIPS-compliant performance presentation. Which of the following is least likely compliant with GIPS? American Securities:
A) calculates total firm assets using all fee-paying, non-fee-paying, discretionary, and client-directed accounts.
B) only provides a compliant presentation to prospects who have not received one during the last 12 months.
C) provides a compliant presentation for composites that the firm currently offers to clients, to any prospect who requests one. - CORRECT ANSWER C) provides a compliant presentation for composites that the firm currently offers to clients, to any prospect who requests one.
To be compliant with GIPS, firms must make compliant presentations available to prospects, on request, for any composite the firm has offered in the last five years, even for composites that have been terminated.
Betty Cantor, CFA, has been finishing a report on high-tech firm HLC Corporation and intends to give it a "market perform" rating. Before releasing the report, she speaks with Donald Watson, her former manager and mentor, who is now with another investment firm and is well known for his great calls on high-tech companies. Watson is bullish on HLC and tells Cantor that "HLC is going to increase for sure over the next year, and we have it as a buy." Cantor changes her rating on HLC to "outperform" based on Watson's comments. Cantor has:
A) not violated the Standards because she knows the high quality of Watson's analysis.
B) violated the Standards because she based her rating on material nonpublic information.
C) violated the Standards because she does not have a reasonable basis for her recommendation. - CORRECT ANSWER C) violated the Standards because she does not have a reasonable basis for her recommendation.
Cantor violated Standard V(A) Diligence and Reasonable Basis because she did not have a reasonable and adequate basis for recommending clients buy HLC. Watson's enthusiasm and claim that HLC stock will perform well are not consistent with Cantor's conclusions. She must perform her own analysis before changing her investment recommendation. She has also violated Standard I(B) Independence and Objectivity because she has not exhibited the independence of analysis and thought that is required by the Standard.
Tom Hayes, CFA, changed firms recently, becoming the senior analyst at Balcom Management. He had earned a great reputation at his old firm with his analysis of Selldex, which doubled in value after his recommendation. Because he still likes Selldex, Hayes recreates from public sources the records and analysis he did at his previous employer and issues a report on Selldex with a "buy" rating. Hayes has:
A) not violated the Standards.
B) violated the Standards because the analysis he did for his previous employer belongs to his previous employer.
C) violated the Standards because his analysis is based on previous research and not independent of his prior analysis. - CORRECT ANSWER A) not violated the Standards.
The actions are not in violation of the Standards. Under Standard IV(A) Loyalty, the use in new employment of knowledge and experience gained in previous employment is not prohibited. Hayes recreated the supporting records as required by Standard V(C) Record Retention.
Craig Boone, CFA, a fixed-income trader, observes that one of the salesmen on the desk has been allocating his trades at the end of the day, giving better execution to large clients, a practice Boone suspects is illegal. The salesman tells Boone this is a common practice and that the firm's senior management is aware of it. If Boone makes a personal record of the activity, takes it home for his personal files, and subsequently reveals it to regulatory authorities, he would:
A) not be in violation of any Standards.
B) be in violation of the Standards for disclosing confidential information.
C) be in violation of the Standards for breaching his duty of loyalty to his employer. - CORRECT ANSWER A) not be in violation of any Standards.
According to Standard IV(A) Loyalty, the interests of a member or candidate's employer are secondary to protecting the interests of clients and the integrity of capital markets. In this circumstance, whistleblowing is justified. As long as his motivation is clearly not for personal gain, he may, according to the Standards, violate employer confidentiality in this case. While he is required to dissociate from the suspect activity by Standard I(A) Knowledge of the Law, he is not prohibited by the Standards from reporting it unless a stricter local law applies.
Lynn Black, CFA, is an analyst with the underwriter for an upcoming issue of Mtex Software debentures. Black learns from an employee in Mtex's programming department that there is a serious problem with Mtex's newest software program and that many customers have canceled their orders with Mtex. There is no mention of these problems in the prospectus for the debentures, which has been circulated. According to the CFA Institute Standards of Professional Conduct, Black's best course of action is to:
A) inform her supervisor of her discovery.
B) take no action because this is material nonpublic information.
C) notify potential investors of the omission on a fair and equitable basis. - CORRECT ANSWER A) inform her supervisor of her discovery.
Black is in possession of material nonpublic information, and her most appropriate course of action is to inform her supervisor (or the firm's compliance officer) of what she has learned. She may not simply share the information with prospective buyers; if her firm determines that the information affects the value of the debentures, they must revise and recirculate the prospectus. Failing to do so may violate Standard I(C) Misrepresentation. Not informing her employer may be detrimental to her firm's interests and reputation if proceeding with the new issue without disclosure would violate regulations or laws.
Sanctions that may be imposed on members by CFA Institute include:
A) public censure, suspension of membership, and fines.
B) suspension of membership, revocation of CFA charter, and fines.
C) public censure, suspension of membership, and revocation of CFA charter. - CORRECT ANSWER C) public censure, suspension of membership, and revocation of CFA charter.
If a Professional Conduct Program inquiry finds that a member has violated the Code and Standards, CFA Institute may impose sanctions, which include public censure, suspension of membership in CFA Institute and use of the CFA designation, and revocation of a member's CFA charter. CFA Institute does not impose fines.
Mary Walters, CFA, is a bank trust officer who has entered into a referral agreement with Bob Sear, a tax attorney. Sear has told Walters that he will do her tax work in return for referrals. According to the CFA Institute Code and Standards, Walters must disclose:
A) only the fact that she compensated for referrals, to any clients or prospects she refers to Sear.
B) only the fact that she is compensated for referrals, to her employer and any clients or prospects she refers to Sear.
C) the fact that she is compensated for the referrals and the nature of the compensation she is to receive, to her employer and any clients or prospects she refers to Sear. - CORRECT ANSWER C) the fact that she is compensated for the referrals and the nature of the compensation she is to receive, to her employer and any clients or prospects she refers to Sear.
Standard VI(C) Referral Fees requires members and candidates to disclose any compensation received for referrals and the nature of the compensation, to their employers and to any clients or prospects they refer to others with the expectation of compensation in any form.
Ronaldo Jenkins, CFA, chief investment officer for Windwatch Advisors, has been helping his local municipality find an investment bank for a bond issue. Jenkins was told in confidence that one investment bank, which is a subsidiary of a commercial bank held in Windwatch client portfolios, is experiencing financial difficulties and will be shut down soon. According to the CFA Institute Standards of Professional Conduct, Jenkins is least likely permitted to:
A) share the information received about the investment bank with his compliance officer.
B) share the information received about the investment bank with Windwatch's head of equity investments.
C) approach the investment bank about making public disclosure of the financial difficulties and pending closure. - CORRECT ANSWER B) share the information received about the investment bank with Windwatch's head of equity investments.
The information received by Jenkins is covered by Standard II(A) Material Nonpublic Information, under which members who possess material nonpublic information related to the value of a security are prohibited from trading, or causing others to trade in, that security. For purposes of compliance with Standard II(A), Jenkins may attempt to achieve public dissemination of the information and may inform his compliance officer of the information. However, under no circumstances should Jenkins share material nonpublic information with other investment personnel. Sharing such information may cause others to trade on the information in violation of Standard II(A).
While visiting Cassori Company, Mark Ramsey, CFA, overhears management make comments that are not public information but are not really meaningful by themselves. Combining this information with his own analysis and other outside sources, Ramsey decides to change his recommendation on Cassori from "Buy" to "Sell." According to the CFA Institute Standards of Professional Conduct, Ramsey:
A) must not issue his report until Cassori's management makes their comments public.
B) may issue his "Sell" report because the facts are nonmaterial, but should maintain a file of the facts and documents leading to this conclusion.
C) must report these events to his immediate supervisor and legal counsel, since they have become material in combination with his analysis. - CORRECT ANSWER B) may issue his "Sell" report because the facts are nonmaterial, but should maintain a file of the facts and documents leading to this conclusion.
According to Standard II(A) Material Nonpublic Information, the use of security analysis combined with nonmaterial nonpublic information to arrive at significant conclusions is allowable under the mosaic theory.
Compliance with the Global Investment Performance Standards least likely requires firms to:
A) include all fee-paying and non-fee-paying accounts in at least one composite.
B) document in writing the policies and procedures used to comply with GIPS.
C) specifically define what constitutes the firm that is claiming compliance. - CORRECT ANSWER A) include all fee-paying and non-fee-paying accounts in at least one composite.
All fee-paying discretionary accounts must be included in composites, but including non-fee-paying accounts is not required. The other statements are requirements for compliance.
Jim Franklin recently purchased a home for $300,000 on which he made a down payment of $100,000. He obtained a 30-year mortgage to finance the balance on which he pays a fixed annual rate of 6%. If he makes regular, fixed monthly payments, what loan balance will remain just after the 48th payment?
A) $186,109.
B) $189,229.
C) $192,444. - CORRECT ANSWER B) $189,229.
With monthly payments, we need a monthly rate:
6% / 12 = 0.5%. Next, solve for the monthly payment. The calculator keystrokes are:
PV = 200,000; FV = 0; N = 360; I/Y = 0.5; CPT → PMT = −$1,199.10. The balance at any time on an amortizing loan is the present value of the remaining payments. There are 312 payments remaining after the 48th payment is made. The loan balance at this point is: PMT = −1,199.10; FV = 0; N = 312; I/Y = 0.5; CPT → PV = $189,228.90.
Note that only N has to be changed to calculate this new present value; the other inputs are unchanged.
An investor purchased a $10,000, 5-year corporate note one year ago for $10,440. The note pays an annual coupon of $600. Over the past year, the note's annual yield-to-maturity has dropped by 1%. What total return did the investor earn over the year?
A) 8.5%.
B) 9.0%.
C) 9.5% - CORRECT ANSWER A) 8.5%
What is a bond question doing here? CFA Institute examiners can and will insert material from other topics as they see fit. This is just a reminder to be on your guard!
First, find the yield on the note at time of purchase. The appropriate calculator steps are:
PV = −10,440; FV = 10,000; PMT = 600; N = 5; CPT → I/Y = 4.9842%. Next, value the note at a yield of 3.9842% with four years to maturity.
FV = 10,000; PMT = 600; N = 4; I/Y = 3.9842; CPT → PV = $10,731.99.
Finally, calculate the holding period return. The formula is:
- CORRECT ANSWER
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