CFA Level 1 Test Questions 42 Questions with Answers,100% CORRECT

CFA Level 1 Test Questions 42 Questions with Answers Allen Jabber invested $400 at the beginning of the last 12 months in the shares of a mutual fund that paid no dividends. Which Method will he correctly choose to ...

CFA Level 1 Test Questions 42 Questions with Answers Allen Jabber invested $400 at the beginning of the last 12 months in the shares of a mutual fund that paid no dividends. Which Method will he correctly choose to calculate his average price per share from the monthly share prices? a) Arithmetic Mean b) Harmonic Mean c) Geometric Mean - CORRECT ANSWER Harmonic Mean - The harmonic mean of the 12 purchase prices will be his average price paid per share. Colonia has 2 political parties, the Wigs and the Wags. If the Wags are elected there is a 32% probability of a tax increase over the next 4 years. If the Wigs are elected there is a 60% probability of a tax increase. There is a 20% probability the that the Wags will be elected. The sum of the (unconditional) probability of a tax increase and the joint probability that the wigs will be elected and there will be no tax increase is closest to: a) 55% b) 70% c) 85% - CORRECT ANSWER 86.4% = C The unconditional probability of a tax increase is: 0.2(0.32) + 0.8(0.6) = 54.4%. The joint probability that the Wigs will be elected and there will be no tax increase is: 0.8(0.4) = 32%. The sum is: 54.4 + 32 = 86.4%. An analyst who wants to display the relationship between two variables graphically is most likely to use: a) a histogram b) a scatterplot c) a frequency polygon - CORRECT ANSWER B = Scatterplot Scatterplots illustrate the relationship between two variables. Histograms and frequency polygons show the distribution of observations for a single variable. Ralph will retire 15 years from today and has saved $121,000 in his investment account for retirement. He believes he will need 37,000 at the beginning of each year for 25 Years of retirement, with the first withdrawal on the day he retires. Ralph assumes his account will earn 8%. The amount he needs to deposit at the beginning of this year and each of the following 14 Years (15 in all) is closest to: a) 1350 b) 1450 c) 1550 - CORRECT ANSWER B = 1450 Step 1: Calculate the amount needed at retirement at t = 15, with your calculator in BGN mode. N = 25, FV = 0, I/Y = 8, PMT = 37,000, CPT PV = -426,564 Step 2: Calculate the required deposits at t = 0,1,....,14 to result in a time 15 value of 426,564, with your calculator still in BGN mode. PV = -121,000, N = 15, I/Y = 8, FV = 426,564, CPT PMT = -$1,457.21 The current price of Bosto shares is $50. Over the coming year, there is a 40% probability that share returns will be 10%, 40% probability returns will be 12.5%, and a 20% probability share returns will be 30%. Bostos expected return and standard deviation of returns for the coming year are closest to: a) E(R) = 15% Standard Dev = 7.58% b) E(R) = 17.5% Standard Dev = 5.75% a) E(R) = 17.5% Standard Dev = 7.58% - CORRECT ANSWER A E[R] = (0.4)(10) + (0.4)(12.5) + (0.2)(30) = 15% Variance = (0.4)(10 − 15)2 + (0.4)(12.5 − 15)2 + (0.2)(30 − 15)2 = 57.5 Standard deviation=√57.5=7.58% Nikki Ali and Donald Ankard borrowed $15,000 to finance their wedding and reception. The fully amortizing loan at 11% requires equal payments at the end of each of the next seven years. The principle portion of the first payment is closest to: A) 1500 B) 1530 C) 1560 - CORRECT ANSWER B The interest portion of the first payment is simply principal × interest rate = (15,000 × 0.11) = 1,650. Using a financial calculator: PV = 15,000, FV = 0, I/Y = 11, N = 7, CPT PMT= $3,183 Principal = payment − interest = 3,183 − 1,650 = 1,533 Which of the following statements about probability distributions is least accurate? A) Continuous uniform distributions have cumulative distribution functions that are straight lines from 0 to 1. B) The probability that a continuously distributed random variable will take on a specific value is always 0. C) A normally distributed random variable divided by its standard deviation will follow a standard normal probability distribution. - CORRECT ANSWER C A standard normal probability distribution has a mean of zero, so subtracting the mean from a normal random variable before dividing by its standard deviation is necessary to produce a standard normal probability distribution. An analyst wants to construct a hypothesis test to determine whether the mean weekly return on a stock is positive. The null hypothesis for this test should be that the mean return is: A) Greater than zero B) Less than or equal to 0 C) Greater than or equal to 0 - CORRECT ANSWER B = Less than or equal to 0. Null hypothesis = condition if rejected would lend evidence to true alternative hypothesis. Alternative = Mean is Greater than 0. Null = Less than or = 0. X, Y, and Z are independently distributed random variables. The probability of X is 30%, the probability of Y is 40%, and the probability of Z is 20%. Which is closest to the probability that X or Y will occur? A) 70% B) 58% C) 12% - CORRECT ANSWER B = 58% The probability of X or Y is P(X) + P(Y) − P(XY). 0.3 + 0.4 − (0.3)(0.4) = 58% An analyst should use a t-test with n-1 degrees of freedom to test a null hypothesis that two variables have: A) equal means B) equal variances c) no linear relationship - CORRECT ANSWER A = Equal Means Differences in Means = T-Tests (N-1) Tests of Correlation = T-Tests (N-2) Tests for equality of variances = F-Tests The percentage changes in annual earnings for a company are approximately normally distributed with a mean of 5% and a standard deviation of 12%. The probability that the average change in earnings over the 5 years will be greater than 15.5% is closest to: A) 2.5% B) 5.0% C) 10% - CORRECT ANSWER A = 2.5% The standard error of a 5-year average of earnings changes is 12%√5=5.366.% 15.5% is 15.5−5/5.366=1.96 standard errors above the mean The probability of a 5-year average more than 1.96 standard errors above the mean is 2.5% for a normal distribution. Which of the following is least likely correct concerning a random variable that is lognormally distributed? A) It has a symmetric distribution. B) The natural logarithms of the random variable are normally distributed. c) It is a univariate distribution. - CORRECT ANSWER A = It has a symmetric distribution (false) A lognormal distribution is skewed to the right (positively skewed) An analyst is evaluating the degree of competition in an industry and compiles the following information: - Few Significant barriers to entry - Firms in the industry produce slightly differentiated products - Each firm faces a demand curve that is largely unaffected by the actions of other individual firms in the industry. This should be characterized as: A) Oligopoly B) Monopoly C) Monopolistic Competition - CORRECT ANSWER C = Monopolistic Competition Few Barriers to Entry + Little Interdependence among firms = Monopolistic Competition Which of the following statements about the behavior of firms in a perfectly competitive market is least accurate? A) A firm experiencing economic losses in the short run will continue to operate if its marginal revenues are greater than its variable costs. B) A firm that is producing less than the quantity for which marginal cost equals market price would lose money by increasing production C) If firms are earning economic profits in the short run, new firms will enter the market and reduce economic profits to zero in the long run. - CORRECT ANSWER B A firm that is producing MORE than the quantity where it's marginal revenue (market price in perfect comp) is equal to its marginal cost is losing money on sales of additional units. A firm producing where marginal cost is less than price is foregoing additional profit by not increasing production. The other responses accurately describe characteristics of perfectly competitive markets. Compared to a customs union or a common market, the primary advantage of an economic union is that: A) It's members adopt a common currency. B) It's members have a common economic policy. C) It removes barriers to imports and exports among its members. - CORRECT ANSWER The advantage of an economic union is that its members establish common economic policies and institutions. A common currency is a characteristic of a monetary union. All regional trading agreements remove barriers to imports and exports among their members. A Country's balance of payments accounts show the following: - A net inflow of capital transfers. - Greater sales than purchases of non financial assets. - Greater foreign owned assets in the country than government owned assets abroad. The country is most accurately described as having: A) Capital account deficit. B) Current account deficit. C) a financial account deficit. - CORRECT ANSWER B = A current account deficit. The components listed indicate the the capital and financial accounts are in surplus. This indicates that the current account must be in deficit. Other things equal, an increase of 2.0% in the price of Product X results in a 1.4% increase in the quantity demanded of Product Y and a 0.7% decrease in the quantity demanded of Product Z. Which statement about products X, Y, and Z is least accurate? A) Products X and Y are substitutes. B) Products X and Z are complements. C) Products Y and Z are complements. - CORRECT ANSWER C - Products Y and Z are complements (False). It does not necessarily follow from the information given in the question that products Y and Z are complements. The increase in the price of Product X caused the quantity demanded of Product Y to increase (positive cross-price elasticity) and caused the quantity demanded of Product Z to decrease (negative cross-price elasticity). This suggests that Product Y is a substitute for Product X, and Product Z is a complement to Product X. But this does not mean Product Y is a complement to Product Z. For example, gasoline is a complement to automobiles; bicycles are a substitute for automobiles; but gasoline is not a complement to bicycles. The EUR/USD spot exchange rate is 0.70145, and one-year interest rates are 3% in EUR and 2% in USD. The forward USD/EUR exchange rate is closest to: A) 1.1426 B) 1.4118 C) 1.4396 - CORRECT ANSWER B = 1.4118 EUR/USD x EUR 1Y IR / US 1Y IR = .7083 --> 1/.7083 = 1.4118 Depreciation of a country's currency is most likely to narrow its trade deficit when: A) Its imports are greater in value than its exports. B) Price Elasticity of import demand is greater than one. C) Investment increases relative to private and government savings. - CORRECT ANSWER B = Price elasticity of import demand is greater than one. The more elastic import demand and export demand are, the more likely currency depreciation is to narrow a trade deficit. A country with a trade deficit imports more than it exports. An increase in investment relative to saving would tend to increase the trade deficit. (Net Exports = Private and Gov Savings - Investment) According to real business cycle theory, business cycles result from: A) Rational responses to external shocks. B) Inappropriate changes in monetary policy. C) Increases and Decreases in business confidence. - CORRECT ANSWER A = Rational responses to external shocks Real Business Cycle = Cycles driven by individuals maximizing utility and changes in economic factors such as Technology. Keynesian Cycle = Changes in business confidence. Monetarist = Inappropriate changes in money supply growth. A decrease in the target US Federal Funds Rate is least likely to result in: A) a proportionate decrease in long-term interest rates B) an increase in consumer spending on durable goods. C) depreciation of the US dollar on the foreign exchange market. - CORRECT ANSWER A = a proportionate decrease in long term interest rates. Changes unlikely to be proportionate. LTR = STR + Anticipated Inflation For an economy that initially at full employment real GDP, an increase in aggregate demand will most likely have what effects on the price level and Real GDP in the short run? A) Both will increase in the short run. B) Neither will increase in the short run. C) Only one will increase in the short run. - CORRECT ANSWER A = Both will increase in the short run. An increase in aggregate demand will cause short-run equilibrium to move along the short-run aggregate supply curve. This will tend to increase both real GDP and the price level in the short run. Potential real GDP is least likely to increase as a result of: A) An improvement in technology. B) An increase in the money wage rate. C) An increase in the labor force participation ratio. - CORRECT ANSWER B = an increase in the money wage rate. An increase in the money wage rate would not increase long-run aggregate supply (potential real GDP), but instead would decrease the short-run aggregate supply curve. An improvement in technology would tend to increase potential real GDP. An increase in the participation ratio increases the full-employment quantity of labor supplied and potential real GDP. When the economy is operating at the natural rate of unemployment it is most likely that: A) Inflation is accelerating B) Frictional unemployment is absent. C) Structural unemployment is present. - CORRECT ANSWER C) Structural unemployment is present. Structural and frictional unemployment are always present. The fundamental qualitative characteristics of financial statements as described by the IASB conceptual framework least likely include: A) Relevance B) Reliability C) Faithful Representation - CORRECT ANSWER B - Reliability. The IASB characteristics include relevance and faithful representation. A decrease in a firm's inventory turnover ratio is most likely a result from: A) a write down of inventory B) good in inventory becoming obsolete C) decreasing purchases in a period of sales - CORRECT ANSWER B - Good in inventory becoming obsolete. Inventory Turnover = COGS / Average Inventory Becoming obsolete generally makes them undesirable for sale (Lower COGS in the future). This may be a precondition for a write down but in and of itself is not. Write downs decrease average inventory and thus increase the ratio. Purchases decreasing while sales remain stable again decreases the denominator and the ratio as a whole. Two Firms are identical except that the first pays higher interest and lower dividends while the second pays higher dividends and lower interest. Both are US GAAP firms. Compared to the first, the second will have CFF and EPS that are: CFF EPS A) Same Higher B) Lower Higher C) Lower The Same - CORRECT ANSWER B) Lower / Higher US GAAP = Dividends = CFF US GAAP = Interest = CFO Interest Expense before EPS. Dividends after EPS. The following summarizes financial statements for the year ending, December 31 2019: Sales = 800,000 Net Profit Margin = 20% Sales to Assets = 50% Equity Multiplier = 1.6 Interest Expense = 30,000 Dividends Declared = 32,000 Sustainable Growth Rate is closest to: A) 3.2% B) 8.0% C) 12.8% - CORRECT ANSWER C - 12.8% Sustainable Growth Rate = ROE x Retention Rate ROE = Net Profit / Shareholders Equity Total Assets: 800,000 / .5 = 1,600,000 SH Equity: 1.6 = 1,600,000 / X ---> X = 1,000,000 Net Profit: 800,000 x .2 = 160,000 ROE = 160,000/1,000,000 = 16% Retention Rate = 1 - (Dividend Payout Ratio) Dividend Payout Ratio = Dividend / Net Profit DPOR = 32,000 / 160,000 = 20% Retention Rate = 1 - .20 = .80 Sustainable Growth Rate = .16 x .8 = 12.8% Company issued employee stock options for 400,000 shares. Options on 200,000 shares have a strike price of $18. Options on the other 200,000 shares have a strike price of $22. Year end stock price is $24. Average stock price is $20. Change in number of shares for calculating diluted EPS is closest to: A) 20,000 Shares B) 67,000 Shares C) 100,000 Shares - CORRECT ANSWER A - 20,000 Shares Only the $18 options are exercisable and thus dilutive. ( (Average Price - Strike Price) / Average Price ) x Total Dilutive Shares = 20,000 Shares Snowmobile manufacturer uses LIFO and begins the year with an inventory of 3000 with a carrying cost of $4000 per unit. The company sells 2000 in January for $10,000 each. In July the company adds 4000 at $5000 each. What is the difference if the company uses a periodic system instead of a perpetual inventory inventory system. A) Increase COGS by 2,000,000 B) Leave ending inventory unchanged C) Decrease Gross Profit by 4,000,000 - CORRECT ANSWER A - Increase COGS by 2,000,000 Perpetual: Sales = 20,000,000 = 10,000 x 2000 COGS = 8,000,000 = 4000 x 2000 ------------------------------------ Gross Profit = 12,000,000 Ending Inventory = 24,000,000 Periodic: Sales = 20,000,000 = 10,000 x 2000 COGS = 10,000,000 = 5000 x 2000 ------------------------------------ Gross Profit = 10,000,000 Ending Inventory = 22,000,000 Which of the following is least likely to result in low-quality financial statements? A) Unsustainable Cash Flows B) Activities that manage earnings C) Conservative Accounting Choices - CORRECT ANSWER A- Unsustainable Cash Flows Just because unsustainable does not make them unreliable. Managing earnings creates suspicion about current actual values. Accounting choices are supposed to be neutral - neither conservative or aggressive. Company paid 8 million to acquire a franchise at the beginning of 2005 that was expensed in 2005. If train had elected to capitalize the franchise as an expense and amortize the cost of the franchise over 8 years, what effect would this have on trains 2005 CFO and 2006 Debt to Assets Ratio? A) Both would be higher with capitalization. B) Both would be lower with capitalization. C) One would be higher and one would be lower with capitalization. - CORRECT ANSWER C - One would be higher and one would be lower with capitalization. If the cost was amortized the (8,000,000) payment would be classified as an investing cash flow instead of an operating cash flow increasing CFO. The asset created by capitalizing the cost would increase assets, so the debt to assets ratio would increase. Graphics Inc. has a deferred tax asset of $4,000,000 on its books. As of December 31 it is probable that $2,000,000 of the deferred tax assset's value will never be realized because of the uncertainty about future income. Under US GAAP, Graphics Inc should: A) Reduce the deferred tax asset account by 2,000,000 B) Establish a valuation allowance of 2,000,000 C) Establish an offsetting deferred tax liability of 2,000,000 - CORRECT ANSWER B - Establish a valuation allowance of $2,000,000. If it becomes probable that a portion of a deferred tax asset will not be realized, a valuation allowance should be established to offset the balance. Long lived assets cease to be depreciated when the firms management decides to dispose of the assets via: A) Sale B) Abandonment C) Exchange for another asset - CORRECT ANSWER A - Sale. Under GAAP and IFRS long lived assets that become "held-for-sale " cease to be depreciated. Assets that are to be abandoned or exchanged are classified as "held for use" and continue to depreciate. An asset's tax base is most accurately described as: A) tax deductible expense that appears in the tax return in a given period. B) amount of the asset that will not be expensed through the tax return in the future as economic benefits are realized. C) amount of the asset that will be expensed through the tax return in the future as economic benefits are realized. - CORRECT ANSWER C - Amount of the asset to be expenses through the tax return as economic benefits are realized. In the notes to its financial statements, Gilbert Company discloses a €400,000 reversal of an earlier write-down of inventory values, which increases this inventory's carrying value to €2,000,000. It is most likely that: A) The reasons for this reversal are also disclosed. B) A gain of $400,000 appears on the income statement C) The net realizable value of this inventory is $2,000,000 - CORRECT ANSWER A - The reasons for this reversal are also disclosed. Under IFRS the amount of any reversal of previous write downs are a required disclosure. If a firms management wishes to use it's discretion to increase operating cash flows, it is most likely to: A) Capitalize an expense B) Decrease the allowance for doubtful accounts. C) change delivery terms from FOB destination to FOB Shipping point. - CORRECT ANSWER A - Capitalize an expense. By capitalizing the firm categorizes the expense as CFI rather than CFO. Allowance for doubtful accounts and changing shipping recognition of revenue affects earnings but not CFO. A firm that purchases a building that it intends to rent out for income would report this as investment property under: A) US GAAP only B) IFRS only C) Both US GAAP and IFRS - CORRECT ANSWER B - IFRS only. IFRS distinguishes between investment property and other types of assets. US GAAP does not. When a company redeems bonds before they mature, the gain or loss on debt extinguishment is calculated as the bonds carrying amount minus the: A) Face or par value of the bonds B) Amount required to redeem the bonds C) Amortized historical cost of the bonds - CORRECT ANSWER B - Amount required to redeem the bonds. Under IFRS, when a company redeems bonds before they mature, the company records a gain or loss equal to the bonds' carrying amount minus the cash amount required to redeem the bonds. Which of the following terms from the extended DuPont equation would an analyst least likely be able to obtain, given only a company's common-size income statement and common-size balance sheet? The company's: A) EBIT Margin B) Asset Turnover C) Financial Leverage - CORRECT ANSWER B - Asset Turnover Common sized statements show balances as percentage values of sales or total assets. Asset turnover requires a balance from each of these statements making the hard numbers required. An analyst is comparing a US GAAP firm and an IFRS Firm. The analyst is least likely required to do which of the following to facilitate the comparison? A) Add the LIFO reserve to inventory for a US firm that uses LIFO. B) Adjust the values of assets reported using the revaluation model. C) Adjust the income statement of one of the firms if both have significant unrealized gains or losses from changes in FV of trading securities. - CORRECT ANSWER C - Adjust the income statement of one of the firms if both have significant unrealized gains or losses from changes in FV of trading securities. Unrealized gains and losses on trading securities are reported in the income statement under both U.S. and IFRS standards, so no adjustment is necessary. Since LIFO is not permitted under IFRS, adjusting the inventory amount for a LIFO firm is a likely adjustment. The revaluation model, which allows adjustment of asset values to fair value, is permitted under IFRS but not under U.S. GAAP. An adjustment for this difference may improve the comparability of financial ratios. An analyst wants to compare the cash flows of two United States companies, one that reports cash flow using the direct method and one that reports it using the indirect method. The analyst is most likely to: A) convert the indirect statement to the direct method to compare the firms cash expenditures. B) adjust the reported CFO of the firm that reports under the direct method for depreciation and amortization expense. C) Increase CFI for any dividends reported as investing CF by the firm reporting under the direct method. - CORRECT ANSWER A - convert the indirect statement to the direct method to compare the firms cash expenditures. By converting a cash flow statement to the direct method, an analyst can view cash expenses and receipts by category, which will facilitate a comparison of two firms' cash outlays and receipts. CFO is correct under either method and requires no adjustment. Neither dividends received nor dividends paid are classified as CFI under U.S. GAAP