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Level I of CFA Program

6th Mock Exam

June 2020
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 Level I of CFA Program Mock Exam 6 – Questions (PM)

[Link] – 6th Mock Exam 2020 (PM Session)

Questions Topic Minutes

1-18 Ethical and Professional Standards 27
19-30 Quantitative Methods 18
31-42 Economics 18
43-60 Financial Reporting and Analysis 27
61-72 Corporate Finance 18
73-86 Equity Investments 21
87-92 Derivative Investments 9
93-104 Fixed Income Investments 18
105-110 Alternative Investments 9
111-120 Portfolio Management 15
Total 180

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

Questions 1 through 18 relate to Ethical & Professional Standards

1. Janice Hart is a research analyst serving Time Associates, an investment banking

firm. She has been asked to write a research report on Blue Inc. Time was the
chief underwriter of Blue Inc.’s stock when it had undertaken an IPO two years
ago. In addition, two of Time’s directors continue to hold a significant proportion
of Blue Inc. shares.

Hart’s best course of action will be to:

A. decline writing the research report due to the presence of a conflict of

interest.
B. write the research report and disclose the special relationship to clients on
a request basis.
C. write the research report and include a disclosure of the special
relationship between Time Associates and Blue Inc.

2. Wallace Associates is a sell-side research firm with clients primarily from the
financial services sector. Midland Trust is Wallace Associates’ most recent client.
Sarah Parker, a research analyst has been assigned Midland Trust. Parker is
compensated with a basic research fee and agent options, which allow her to
purchase 2% of her client’s common shares if the stock performs well. After
conducting thorough research using public sources, she determines that a buy
recommendation will be most appropriate. She includes a small footnote at the
end of the report that discloses the volume and expiration date of the options she
is eligible for.

According to the Standards of Practice Handbook, Parker is in:

A. violation because her disclosure is not prominent.

B. compliance because she has disclosed the extent of her participation in the
options.
C. violation because the acceptance of the agency options may impair her
independence and objectivity.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

3. Trisha Jose is a supervisor at a commercial bank. She has been informed that
particular employee has been deliberately delaying sending reminders to clients
whose accounts are overdue.

With respect to the employee, Jose’s best course of action to take is:

A. dismissal.
B. issuing a warning.
C. suspension of responsibilities.

4. An investment manager notifies clients of a change in recommendation via email.

He then calls three of his oldest clients to discuss the change in greater detail. Not
all his clients receive the recommendation at the same time and are unhappy with
the delay in notification.

Has the investment manager dealt with his clients fairly?

A. Yes, he is only required to ensure each client is fairly dealt with.

B. No, he should have discussed the recommendation in greater detail with
all his clients.
C. No, he should have ensured each client received the recommendation at
the same time.

5. According to the Standards of Practice Handbook, an investment manager who

learns that his client is engaged in an illegal activity should:

A. seek legal counsel.

B. inform legal authorities.
C. disclose the activity to the CFA Institute.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

6. Joyce & Monroe (J&M) is an investment bank with its own research division.
Investment banker Ron Howard serves J&M and has recently arranged corporate
financing for its client, Westdale Limited. Westdale will be using the financing to
expand production to Australia. Several weeks later J&M’s chief research analyst
issues a research report on Westdale wherein he recommends, “Westdale’s
decision to expand into Australia is an excellent move because the potential
market for its products should be vast. I am extremely confident that the company
will see a remarkable and positive difference in its earnings over the coming
months. Based on this, I recommend a strong BUY.”

According to the Standards of Practice Handbook, the analyst’s recommendation

is most likely in violation with respect to the standard concerning:

A. misrepresentation; he is guaranteeing investment performance.

B. disclosure of conflicts; he has not disclosed J&M’s relationship with
Westdale.
C. communication with clients and prospects; he has failed to separate
opinion from fact.

7. According to the Standards of Practice Handbook, adequate compliance

procedures are least likely those that:

A. meet industry standards.

B. are uniform on a global basis.
C. can be tailored to the circumstances of a firm.

8. When managing pooled assets to a specific mandate, investment manager (‘s):

A. actions are not governed by the suitability standard.

B. must consider the suitability of an investment for clients.
C. need not consider the suitability of an investment for clients.

9. Which of the following is most likely to be the key feature of GIPS standards?
GIPS standards:

A. rely on the integrity of input data.

B. address every aspect of performance measurement.
C. have evolved over time to focus primarily on returns.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

10. Nelson Won, CFA, is a tax advisor at a financial services firm. His recent article,
on how tax minimization strategies can be effectively implemented for client
portfolios with high tax brackets, has increased his popularity in the industry.
Won is offered to deliver a lecture on tax minimization strategies to employees of
an investment management firm in New Zealand. The firm offers to pay for his
travel expenses and hotel accommodation. Won accepts the offer, informs his
employer, and travels to New Zealand with the trip fully paid by his employer. At
the conclusion of the lecture, Won is invited to a game of golf at an exclusive club
by the senior investment manager. He accepts the offer and informs his supervisor
of the invitation upon his return. According to the Standards of Practice
Handbook, Won is most likely:

A. in violation; he should have paid for the New Zealand trip out of his own
pocket.
B. in violation; he did not seek written permission prior to accepting the golf
game offer.
C. in compliance; details of the golf game were not available to him before
departing for New Zealand.

11. Conduct that constitutes a violation of the CFA Institute Standards of Professional
Conduct concerning ‘Conduct as Members and Candidates in the CFA Program’
includes:

A. cheating on an MBA exam.

B. soliciting employer clients prior to departing.
C. not following security measures implemented for the CFA exam.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

12. Fredric Hart has shifted to Trust Management from Rightway Investments, both
of which are brokerage firms providing asset advisory services. At Trust
Management Hart prepares a brief introduction letter where he highlights the type
of accounts and asset classes he managed as well as the performance results
achieved at Rightway. Hart’s first client at Trust Management is Denver Sports
Inc. He will be responsible for managing the client’s pension plan. After
conducting a suitability analysis, Hart determines that direct real estate is a
suitable asset class and makes an allocation basing his decision on the following
three reasons: 1) Denver has low liquidity needs, 2) Denver has a long-time
horizon and 3) Denver is in a low capital gains tax bracket. According to the
Standards of Practice of Handbook, Hart is most likely in violation of the standard
concerning:

A. loyalty to employer; he has divulged confidential past employer

information.
B. loyalty, prudence and care; he has not acted in the best interests of his
clients.
C. client confidentiality; information concerning account types is considered
confidential information.

13. Marie Thatcher serves the CFA Institute Board of Governors, which is
responsible for the oversight and responsibility for the Professional Conduct
Program. She also manages the investment portfolios of several friends and
family members. In a discussion with one of her clients, Thatcher states, “As a
board member, I will take additional steps to ensure that your interests are looked
after and violations of the Code and Standards are avoided at all costs.
Furthermore, as your portfolio manager I will be kept up-to-date with the latest
developments of and revisions in the Code and Standards.”

Thatcher’s statement is most likely:

A. in violation; she is guaranteeing client account performance.

B. in compliance with the CFA Institute Standards of Professional Conduct.
C. in violation; she is using her association with the CFA Institute to further
professional goals.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

14. Two investment managers engaged in a debate that quickly turned into a conflict
disrupting the working environment of their fellow co-workers. Which of the
following has most likely been violated?

A. Code of Ethics only.

B. Standards of Professional Conduct only.
C. Both Code of Ethics and Standards of Professional Conduct.

15. To comply with the CFA Institute Code of Ethics, members and candidates must:

A. promote the integrity of the legal system.

B. maintain their duty of loyalty towards clients, prospects and employers.
C. place the integrity of the investment profession above their own personal
interests.

16. Which of the following statements least likely highlights a benefit of claiming
compliance with GIPS standards?

A. GIPS standards eliminate the need for the investor to conduct in-depth due
diligence.
B. Investment managers can assure clients that the reported historical track
record is complete.
C. Prospective clients can easily compare the performance of their
investment managers across different firms.

17. Hollard Associates manages two funds, a diversified fund and a fixed-income
fund. The diversified fund is three years old while the fixed-income fund is as old
as the firm (five years old). The performance records of both funds are GIPS-
compliant. The firm is now considering claiming compliance to the GIPS
standards. Which of the following statements most accurately highlights what
Hollard Associates should do in order to claim compliance? Hollard Associates
should:

A. wait for at least two years to claim compliance.

B. only claim compliance for the fixed-income fund.
C. can claim compliance by presenting performance since both composites’
creation dates.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

18. Which of the following is not a section of the Global Investment Performance
Standards?

A. Hedge funds
B. Private equity
C. Wrap fee portfolios

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

Questions 19 through 30 relate to Quantitative Methods

19. A fund manager manages a fixed-income fund and would like the fund to
replicate a benchmark by applying a stratified sampling approach. The manager
first divides the bonds into Government bonds and Corporate bonds. For each of
these sets, the manager then separates the bonds into three maturity intervals 1-5
years, 5-10 years and above 10 years. He then further separates the bonds into
either coupon-paying bond or non-coupon paying bond. The minimum number of
bonds, the fund can have is:

A. 7
B. 8
C. 12

20. Expected returns and standard deviation of three portfolios are given below.

Portfolio Expected Standard

Return Deviation
1 28% 34%
2 32% 46%
3 26% 23%

An investor, hoping to earn at least 6% on his investment every year, will most
likely choose portfolio:

A. 1.
B. 2.
C. 3.

21. A desirable property of an estimator includes:

A. consistency.
B. universality.
C. independence.

22. Mona Patel has invested a portion of her savings in a fund with a stated annual
rate of 4%, which is compounded quarterly.

If Patel’s fund was continuously compounded, the fund’s stated annual rate of
return would have been closest to:

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

A. 3.98%.
B. 4.00%.
C. 4.06%.

23. Sarah is a clinical analyst at Alpha Health Technologies. For the past several
months she has been developing an electronic health record app in her spare time.
Sarah is confident that she will be able to sell the app in two years for around
$600,000. If things go as planned and she invest the money in a saving account
with an estimated 6% per annum rate of return, what will be the future value of
that investment 10 years from now.

A. $956,309
B. $1,074,509
C. $1,207,319

24. The nominal (quoted) annual interest rate on a loan is 12%. If the frequency of
compounding periods per year for the loan is weekly, the effective annual rate of
the loan is closest to:

A. 11.47
B. 12.55%.
C. 12.73%.

25. A sample of 500 portfolios has a mean annual return of 0.18 and standard
deviation of returns of 0.27. The estimate of the sample error of the sample mean
is closest to:

A. 0.0005
B. 0.0121.
C. 0.6670

26. A portfolio is fully invested in an index fund tracking the S&P500. The returns
earned by the index over the past three years are highlighted in the exhibit below:

S&P 500 Equity Index (%)

Year 1: Return 18.5
Year 2: Return 15.1
Year 3: Return 22.2
Mean Return 18.6
Sample variance 3.6

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

The portfolio’s coefficient of variation is closest to:

A. 0.10.
B. 0.19.
C. 5.17.

27. All of the following are the properties of lognormal distribution except:

A. Lognormal distribution has a long right tail.

B. Lognormal distribution is bounded below by 1.
C. Lognormal distribution has thinner tails than normal distribution.

28. Which of the following correlation coefficient between two variables exhibits
strong linearity:

A. 0.10.
B. 0.39.
C. -0.57.

29. Discrete uniform probability distribution of one day profits for a trader is given
below:

Profit Cumulative Distribution Function

$20 0.2
$30 0.4
$40 0.6
$50 0.8
$60 1.0

The probability that a trader will earn profit greater than or equal to $30 and less
than or equal to $50 is closest to:

A. 0.40
B. 0.60
C. 0.80

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

30. A financial analyst is evaluating the liquidity position of a manufacturing concern.

For the purposes of analysis, he has compiled various financial measures such as
the cash, quick and current ratios and cash operating cycles over a ten-year
period. The data used by the analyst can most likely be classified as:

A. panel.
B. time-series.
C. longitudinal.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

Questions 31 through 42 relate to Economics

31. An analyst is evaluating the following spot rates quoted by a dealer:

Spot rate
USD/EUR 1.120
CAD/EUR 1.470
CAD/JPY 0.013

Based on the data presented, the value of one EUR in terms of JPY is:

A. 0.019.
B. 86.154.
C. 113.080.

32. All of the following are exceptions to the law of demand except:

A. Giffen goods.
B. Veblen goods.
C. Normal goods.

33. Which of the following competitive market structures is most likely characterized
by a large number of potential buyers and sellers, low barriers to entry, and firms
with pricing power?

A. Oligopoly
B. Perfectly competitive
C. Monopolistically competitive

34. The economic activity in a developing country has started to accelerate resulting
in higher domestic inflation. In order to maintain its exchange rate target, the
government’s actions will most likely lead to a (n):

A. increase in domestic money supply.

B. decrease in foreign currency reserves.
C. decrease in the cost of short-term borrowing.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

35. A South African company undertook the following transactions, translated into
the South African Rand (ZAR), in the financial year 2013:

• Borrowed ZAR 50 million from a U.S. bank

• Purchased machinery worth ZAR 1.4 million from Japan
• Received ZAR 2.5 million interest income on Dutch fixed income
investments
• Issued ZAR 0.5 million worth of its corporate bonds to an investor in
Brazil.
• Acquired financial leases worth ZAR 1.1 million during the year.
• Total sales proceeds received on foreign sales amounted to ZAR 48.8
million.

The total value of the transactions reflected in the current account is closest to (in
ZAR millions):

A. 51.3.
B. 51.8.
C. 99.3.

36. Grace Singh is a research analyst based in Australia. She is attempting to forecast
exchange rate movements using data collected in the exhibit:

Expected Spot
Spot rate Rate in One Year
AUD/GBP 1.8255 1.8010
GBP/EUR 0.8141 0.8350
GBP/MXN 0.0460 0.0602

Based on the data in the exhibit, the expected appreciation in the EUR against the
MXN over the next year is closest to:

A. – 21.63%.
B. + 2.57%.
C. + 34.23%.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

37. Firms operating in perfectly competitive markets will maximize profits if:

A. total revenues at least cover total costs.

B. marginal revenues exceed marginal costs.
C. total revenues at least cover variable costs.

38. A-Tech is the sole software developer in its country’s market. The total revenue,
marginal revenue and cost functions of the developer are as follows:

Total revenue = 1,500QD – 12.5Q2D

Marginal revenue = 1,500 – 25QD
Marginal cost = 650 + 10QD

A-Tech’s profit will be maximized if its level of output equals:

A. 2 units.
B. 24 units.
C. 57 units.

39. The manager of a small firm gathers the following information about the firm’s
labor utilization and production.

Labor (L) Total Product (Ql)

1 220
2 350
3 490
4 640
5 760
6 870

At an employment level of 4 labor hours, MPL is:

A. 37.5 units
B. 150 units.
C. 160 units

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

40. Which of the following factors will most likely influence the success of a
collusive agreement?

A. Degree of regulation
B. Severity of retaliation
C. Availability of substitutes

41. The sustainable growth rate of potential GDP is calculated as the sum of the
growth rates in labor, capital and:

A. real GDP.
B. technology.
C. natural resources.

42. In December 2011 the value of the Fisher and Paasche index was 115.6 and 125.1
respectively. The value of the price index when the consumption basket is held
constant was closest to:

A. 106.82.
B. 120.26.
C. 135.38.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

Questions 43 through 60 relate to Financial Reporting and Analysis

43. An equity investor is utilizing the following metrics to screen stock investments:

• P/BV < 0.69.

• Dividend yield ≥ 3.5%
• NI/Sales ≥15%

Given the screening criteria, the equity investor is most likely a:

A. Value investor.
B. Growth investor.
C. Market-oriented investor.

44. TS Associates issues $1,000,000 face value of ten-year bonds dated January 1,
2010. The total interest expense on the bonds for the ten-year period is $653,123
while the annual coupon rate is 6%.

Using the straight-line method, the interest expense for the fiscal year 2012 is
closest to:

A. $54,877.
B. $60,000.
C. $65,312.

45. Which of the following ratios will least likely be affected by a company’s choice
of the fair value over cost model for reporting long-lived assets (assuming fair
value is always higher than carrying value) over the long-term?

A. Debt-to-equity
B. Interest coverage
C. Cash flow to revenue

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

46. On January 1, 2012 TRX Associates purchased a component. Tim Rubin, TRX
Associates’ chief financial analyst, is of the option that the component’s balance
sheet value may need to be reduced. Rubin collects relevant financial information
in the exhibit below:

Exhibit: Relevant Financial Information for the Component

Carrying amount £423,000
Undiscounted expected future cash flows £420,000
Present value of expected future cash flows £415,000
Fair value £455,000
Costs to sell £28,000

If TRX prepares and presents its financial statements in accordance with IFRS,
Rubin is most likely:

A. Incorrect.
B. correct; the component will be valued at £415,000.
C. correct; the component will be valued at £420,000.

47. A US GAAP reporting lessor leases an equipment to the lessee. The lease does
not meet the requirements of ownership transfer criteria, but the lease contract
provides guarantee from a 3rd party for the residual value of the asset to the lessor.
Based on the information provided, the lessor can classify the lease as:

A. sales-type lease.
B. direct-finance lease only.
C. either direct finance lease or operating lease.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

48. An analyst has collected information for two companies in the paint
manufacturing industry, Violet and Technard.

Exhibit: Selective Financial Information for

Violet and Technard
Violet Technard
ROE 14.5% 13.3%
Asset turnover 1.6 1.8
EBIT margin 7.7% 6.1%

Which of the following reasons most likely justifies why Violet has a higher
ROE? Higher:

A. efficiency.
B. return on assets.
C. financial leverage.

49. The write-off of a particular account receivable is reflected by reducing:

A. bad debt expense.

B. sales returns and allowances.
C. allowance for doubtful accounts.

50. TSO Limited reported the following information for the fiscal year 2013:

Exhibit
Beginning retained earnings $45,550
Cash dividends paid $1,200
Equity $85,350
Contributed capital $36,155
Operating income $7,520
Taxes paid $2,140

Based on the information presented, reported net income for 2013 is closest to:

A. $2,445.
B. $4,845.
C. $5,380.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

51. GTSW Co, a coffee machine manufacturer, purchases manufacturing equipment

that includes two separately identifiable components- injection molder that wears
out every 8 years and stamping device that has to be replaced every 5 years. The
overall useful life of the whole machine is 8 years.

Component Cost
Injection Molder $600,000
Stamping Device $300,000

Depreciation expense for the first year computed under IFRS will most likely be:

A. $112,500
B. $135,000.
C. $180,000

52. Which of the following is most likely a characteristic of an effective financial

reporting framework?

A. Liquidity
B. Transparency
C. Comparability

53. Xilta, a surgical equipment manufacturer, is constructing a new building for its
administrative staff. Total construction costs amount to $450,000. Xilta has
acquired a three-year loan at an interest rate of 6% to finance the construction.
Only 5% of the loan proceeds are required for the first few months and so the
company invests the remaining proceeds at an annual interest rate of 5% for eight
months.

Ignoring any compounding effects, the total amount of interest to be capitalized

under:

IFRS? U.S. GAAP?

A. $12,750 $27,000
B. $66,750 $81,000.
C. $81,000 $81,000.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

54. Which of the following items will most likely be higher if a lease is classified as
operating as opposed to capital under U.S. GAAP?

A. Total asset turnover

B. Financing cash outflows
C. Net income in the later years

55. The exhibit below illustrates selective financial information for Hoarce Inc. for
the fiscal years 2012 and 2013.

Exhibit
2013 2012
Total assets $500,000 $615,000
Current assets $120,000 $100,000
Current liabilities $105,250 $95,000
Revenue $45,850 $51,200
Total equity $325,000 $300,000

Based on the information presented above, which of the following statements is

most likely correct? Hoarce Inc.’s:

A. efficiency has improved.

B. solvency position has deteriorated.
C. need for capital to fund current assets has increased.

56. Income statement effect of using LIFO method compared to other methods, if
purchase prices are increasing, include lower:

A. cost of sales
B. ending inventory
C. income tax expense.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

57. Dale Buchanan is a credit analyst evaluating the debt repaying ability of two
companies in the same industry, Rax Limited and Halt. The exhibit below
includes selective financial information with respect to the two companies.

Exhibit
Rax Limited Halt
Operating earnings 45 30
Interest payments 12 13
Total debt 35 25
Total equity 120 108

Which company demonstrates a greater ability to service debt?

A. Halt Limited due to lower financial leverage.

B. Rax Limited due to lower interest payments.
C. Rax Limited due to a higher interest coverage ratio.

58. On its balance sheet, ARC Limited reports a deferred tax asset arising from the
different depreciation methods being used for financial reporting and tax
purposes. After further assessment concerning future recoverability, ARC Limited
reduces the carrying amount of the asset using a valuation allowance.

At the end of the financial year Lindsay Smart reassesses the valuation allowance
and determines that any uncertainty concerning future recoverability has been
alleviated. Smart will most likely reverse the valuation if the firm complies with:

A. IFRS but not U.S. GAAP.

B. U.S. GAAP but not IFRS.
C. neither U.S. GAAP nor IFRS.

59. Which of the following is an approximate indicator to determine ‘how many years
of useful life remain for a company’s overall asset base’

!"# %%&
A. '"()"*+,#+-. "/(".0"
12234356789 98:;82<67<=>
B. '"()"*+,#+-. "/(".0"
12234356789 98:;82<67<=>
C. ?)-00 %%&

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

60. An analyst discovered the following differences among three companies Tim
LLC, FFL Inc. and Matt Co.

Abnormal costs Reporting under

incurred as a result of
waste of material
Tim LLC Exclude from IFRS
inventory
FFL Inc. Include in inventory US GAAP
Matt Co. Include in inventory IFRS

Keeping other things constant, compared to:

A. FFL Inc., Matt Co. will overstate inventory value in the balance sheet .
B. Tim LLC, Matt Co. will overstate profitability on the income statement.
C. FFL Inc., Tim LLC will overstate profitability on the income statement
due to the inappropriate deferral of cost recognition.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

Questions 69 through 76 relate to Corporate Finance

61. Which of the following statements is most likely correct regarding the NPV
profile?

A. The profile crosses the vertical axis at a rate equal to the project’s IRR.
B. The rate at which the NPV profile crosses the horizontal axis represents
the project’s required rate of return.
C. Crossover rate is the discount rate at which the NPVs of two projects with
different cash flow patterns are equal.

62. A manufacturer has taken the decision to reduce its stock of inventory in the
current fiscal period. Which of the following financial measures will least likely
be affected as a result of the decision?

A. Quick ratio
B. Current ratio
C. Cash operating cycle

63. The exhibit below presents the accounts receivables figures for two competitors in
the automobile industry.

Exhibit: Automobile Manufacturers Compared to Industry Average

Accounts
Receivables
Credit Sales Turnover
Company A $145,000 5.2
Company B $210,000 6.5
Industry average $185,000 7.0

Using the data in the Exhibit, compared to the industry average, which company
takes a longer amount of time to collect payments from credit sales?

A. Company A
B. Company B
C. both of the companies

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

64. Which of the following statements accurately highlights the issues which should
be considered by an analyst when evaluating a company’s corporate governance
and stakeholder management system?

A. Dual share systems unite voting control and economic ownership.

B. Boards dominated by long-tenured members may have a negative effect
on the board’s diversity.
C. Remuneration plans which offer both a cash-based payout and equity
component misalign the interests of management and shareholders

65. Which of the following statements is most likely correct regarding warehouse
receipts arrangement?

A warehouse receipt arrangement is similar to the:

A. trust receipt arrangement, but there is a third party that supervises the
inventory.
B. trust receipt arrangement but there is no involvement of any third party
that oversees the inventory.
C. inventory blanket lien, in which the lender has a claim on some or all of
the company’s inventory, but the company can sell the inventory in the
ordinary course of business.

66. The exhibit below summarizes key financial results for IAO Inc. for the years
2012 and 2013:

Exhibit
2012 2013
Degree of financial leverage 1.8 1.8
Operating income (in millions) $10.6 $11.2
Net revenues (in millions) $25.5 $20.2

Based on the information presented, the percentage change in net income in 2013
is closest to:

A. – 28.0%
B. – 9.6%.
C. + 10.2%.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

67. A company’s suppliers have modified its credit terms from 2/10 net 30 to 3/10 net
30. The impact of the change in credit policy will most likely:

A. increase the available cash flow.

B. lengthen the net operating cycle.
C. increase the number of days of payables.

68. The exhibit below illustrates selective financial information for a manufacturing
concern for the years 2012 and 2013.

2012 2013
Current ratio 0.8 1.2
Quick ratio* 0.5 0.8
Current liabilities (in millions) $30.5 $32.7
Cost of goods sold (in millions) $15.6 $18.4
*Differs from the current ratio by excluding the inventory balance only.

The company’s number of days of inventory has most likely:

A. shortened by 4 days.
B. shortened by 55 days.
C. lengthened by 45 days.

69. Karl Salone is the chief financial officer at T.R. Enterprises. While evaluating the
company’s liquidity position, Salone makes the following observations:

Observation 1: The company routinely pays its vendors prior to the stated due
dates.
Observation 2: Following the recent deterioration in economic conditions,
arranging short-term borrowing is more restrictive in terms of
both availability and cost.
Observation 3: Due to technological advances in the industry, a significant
proportion of T.R. Enterprises’ inventory has become obsolete.

How many of the above observations reflect a drag on liquidity?

A. 1
B. 2
C. 3

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

70. Which of the following statement is most likely correct regarding passive short-
term borrowing strategies?

A. Passive borrowing strategies are suitable when borrowing is restricted, and

borrowers are limited to one or two lenders.
B. With passive borrowing strategies, borrowers are more in control and do
not fall into the rollover trap that is possible with active strategies.
C. Many passive borrowing strategies are matching strategies. These
matching strategies function is a manner similar to matching investment
strategies.
71. Bill Somers, an equity analyst, is evaluating the stock of Westmore Associates.
Somers has collected the following data with respect to the Westmore stock and
equity market:

Exhibit:
Data Concerning the Market and Westmore Associates’ Stock
Current dividend per share $3.50
Return on equity 5%
Earnings per share $7.50
Market required rate of return 8%
Risk-free rate 3%
Forecasted next period’s price per share $25.50
Current price per share $22.35

The cost of equity (re) using the discounted dividend model (DDM) is closest to:

A. 16.76%.
B. 18.36%.
C. 18.74%.

72. A board of directors does not typically engage in:

A. company’s day-to-day business activities.

B. guiding and approving the company’s strategic direction.
C. selecting, appointing and terminating the employment of senior
management.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

Questions 73 through 86 relate to Equity Investments

73. The current annual dividend for Glasgow Enterprises is $4. Dividends are
forecasted to grow for the next three years at an annual rate of 20% and then 5%
thereafter. The company’s required return on equity is 8% and its weighted
average cost of capital is 10%.

The intrinsic value of Glasgow’s shares is equal to:

A. $206.91.
B. $241.92.
C. $245.32.

74. Asset-based valuation models are best suited for valuing companies:

A. which are privately traded.

B. operating in a hyper-inflationary environment.
C. with a higher proportion of property, plant, and equipment compared to
current assets.

75. The market price of Yacto’s stock decreased by $2 over the financial year 2013. If
the share price at the beginning of the year was $52.50, what dividend yield must
the company maintain to ensure total return is equal to 15%?

A. 3.81%.
B. 11.19%.
C. 18.81%.

76. Market efficiency and asset-pricing models rely on the rationality of:

A. markets only.
B. investors only.
C. markets and investors.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

77. ABC Limited has reported a return on equity, net profit margin and financial
leverage ratio of 15.0%; 0.32; and 2.5 respectively. Asset turnover of ABC
Limited is closest to:

A. 0.12.
B. 0.19.
C. 0.22.

78. A trader purchases the stock of a company by borrowing 35% of the initial stock
price of $50 and financing the remainder with equity. The maintenance
requirement for the position is 25%. The price at which the trader will receive a
margin call is:

A. $8.13.
B. $23.33.
C. $43.33.

79. An analyst has collected the following information concerning a value weighted
index:

Beginning of End of Period

Period
Security Price ($) Shares Price ($) Shares
A 45.56 100 51.87 100
B 61.05 200 67.00 200
C 88.07 300 91.35 300

The return on the index is closest to:

A. 6.50%.
B. 7.42%.
C. 18.51%.

80. A brokered market:

A. is organized as an order-driven market.

B. uses a crossing network to organize market trades.
C. is the platform for trading unique and infrequently traded instruments.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

81. Sylvia Perez has purchased a 3-month put option with an exercise price of $35.00
by paying $5.50. The purpose behind the option purchase is to protect her
investment from adverse price movements. Perez will exercise the option if the
share price:

A. rises above $35.00.

B. declines below $35.00.
C. declines below $40.50.

82. Market bid-ask spread is equal to:

A. the highest bid price – the lowest ask piece.

B. the highest ask price – the lowest bid price.
(7A8 A<BA8C7 D<9 :;<28E7A8 5=F8C7 6CG :;<28)
C. I

83. In contrast to public equity firms, the private equity firm:

A. operates in larger, unregulated markets.

B. management tend to focus on maximizing short-term results.
C. has less effective corporate governance policies and procedures.

84. In contrast to the method of fundamentals, the method of comparables:

A. does not consider the future.

B. is based on the law of one price.
C. is more sensitive to assumptions.

85. Gem Inc. has paid a dividend of $4.55 in the current year. From next year
onwards, annual dividend will grow at a constant rate of 2%. The company’s
shareholders require an 8% return to compensate for the risk associated with
equity shares. The intrinsic value of the stock is closest to:

A. $75.83.
B. $77.35.
C. $78.90.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

86. Lockwood Associates is a recently established financial services firm. The

company will not be paying its shareholders dividends in the near future due to
insufficient profits. The date for initiating dividend payments is highly uncertain.

Which model will be most suitable for valuing the intrinsic value of company
stock?

A. Free cash flow model

B. Gordon growth model
C. Dividend discount model

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

Questions 87 through 92 relate to Derivatives

87. Consider a call option selling for $8 in which the exercise price is $100. The
maximum loss to the buyer will be closest to:

A. $8.
B. 108
C. unlimited.

88. Which of the following derivative instruments entails default risk which is from
the short to the long only?

A. Swaps
B. Options
C. Forwards

89. The combined actions of arbitragers:

A. push up the market prices.

B. cause the divergence of prices.
C. bring about the convergence of prices.

90. Futures prices can differ from forward prices because

A. because of the effect of interest rates on interim cash flows.

B. because of the right to exercise early always has a value to the futures.
C. only if there are cash flows on the underlying such as dividend or interest.

91. All of the following contracts are privately negotiated and are subject to default
except:

A. swaps
B. futures
C. forwards

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

92. Over the counter derivatives are:

A. subject to the risk of default.

B. are guaranteed against default through the clearinghouse.
C. are guaranteed against decrease in value through the clearinghouse.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

Questions 93 through 104 relate to Fixed Income

93. Alex Cunningham is comparing three fixed-income securities held in his

investment portfolio. He would like to determine the issue offering the highest
interest yield. Details regarding the three issues are summarized in the exhibit
below:

Exhibit:
Details Concerning Fixed Income Issues
A B C
Full price per 100 of par value $98.85 $99.70 $103.30
Accrued interest $5.40 $3.10 $2.85
Coupon rate 3% 2% 3%
Coupon payment frequency Annually Quarterly Semi-annually

Which issue offers the highest interest yield?

A. A
B. B
C. C

94. Coupon reinvestment risk:

A. increases with a lower coupon rate.

B. decreases with a longer reinvestment time period.
C. dominates market risk for a buy-and-hold investor.

95. A deferred coupon bond:

A. is issued at a premium to par.

B. permits in kind interest payments.
C. provides tax advantages to the issuer.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

96. Karl Tatsimo invests in two bond issues; a two-year, 5.00% semi-annual coupon
payment corporate bond priced at 95.67 per 100 of par value and a three-year,
3.00% semi-annual coupon payment government bond priced at 93.45 per 100 of
par value.

The corporate bond’s annual yield-to-maturity stated on a semi-annual basis is:

A. equal to 7.37%.
B. equal to that of the government bond.
C. lower than that of the government bond.

97. Fixed-income securities that are issued with a maturity of less than one year are
most likely known as:

A. Eurobonds.
B. money market securities.
C. capital market securities.

98. In the event of company default, the debt category that will rank the highest is:

A. first lien debt.

B. second lien debt.
C. senior unsecured debt.

99. A risk of relying on credit agency ratings least likely include that they:

A. may be fallible.
B. overestimate event risk.
C. tend to lag bond prices and credit spread movements.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

100. The Jameson Foundation has a fixed income portfolio comprising of three
corporate bonds, A, B and C. The exhibit below summarizes details concerning
the fixed income portfolio:

Exhibit
A B C
Annual modified duration 3.4 7.8 12.3
Annual modified convexity 12.2 16.9 23.8
Price per par value 92.34 95.78 99.35

If the yield changes by 50 basis points, the security that will exhibit the greatest
percentage price change is:

A. A.
B. B.
C. C.

101. Which of the following prices is most likely quoted by dealers?

A. Clean price
B. Matrix price
C. Invoice price

102. Assuming the yield-to-maturity is constant, Macaulay and modified durations

A. Jumps upward during a coupon period.

B. Jumps upward when the coupon payment is made.
C. Decline smoothly in a ‘saw-tooth’ pattern, when the coupon payment is
made.

103. Relative to an option-free, a putable bond will most likely:

A. trade at a higher yield.

B. trade at a higher price.
C. is associated with a higher reinvestment risk.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

104. An investor purchases a 2-year, 10% annual coupon payment corporate bond. The
forward curve for one-year rates is demonstrated in the exhibit below:

Exhibit
Time period Forward rate
0y1y 1.0535%
1y1y 2.7984%
2y1y 3.0367%
3y1y 4.7842%

Using the forward rates, the price of the corporate bond per 100 of par value is
closest to:

A. $109.30.
B. $113.32.
C. $115.78.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

Questions 105 through 110 relate to Alternative Investments

105. The exhibit below illustrates real estate valuation data collected by Simone Irk, an
investment analyst. The data collected by Irk concerns real estate investment
trusts (REITs). The analyst would like to employ a direct capitalization approach
when comparing the relative valuations of the three REITs (A, B and C).

Exhibit:
Valuation Data Concerning REIT A, B, and C
Net Gains Recurring
REIT Funds from from Sales Capital Capitalization
operations of Real Estate Expenditures Rate
A $35,000 $4,200 $12,000 5%
B $80,000 $12,400 $28,000 8%
C $75,000 $9,900 $33,500 6%

Using adjusted funds from operations (AFFO), the REIT with the highest
valuation is:

A. A.
B. B.
C. C.

106. Which of the following is most likely the dominant primary private equity fund
strategy?

A. Venture capital
B. Distressed investing
C. Development capital

107. When commodity futures prices are higher than spot prices, the futures market is
said to be in a state of:

A. contango and the convenience yield is low.

B. contango and the convenience yield is high.
C. backwardation and the convenience yield is low.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

108. The characteristics that make a company particularly attractive as an LBO target
least likely include a firm:

A. with depressed stock price.

B. that is inefficiently managed.
C. with weak & unsustainable cash flows.

109. When the futures prices are higher than the spot price, it can most likely to be
concluded that:

A. there is little or nor convenience yield.

B. the commodity forward curve is not upward sloping.
C. interest earned on the collateral is less than risk-free rate.

110. An analyst listed the following characteristics of alternative investments as an

asset class in general.

1. Less transparency
2. High level of regulation
3. Narrow manager specialization
4. Potentially problematic historical risk and return data

How many characteristics he identified correctly?

A. 2
B. 3
C. 4

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

Questions 111 through 120 relate to Portfolio Management

111. Bitcoin is a well-known example of a (an):

A. deep learning network.

B. permissioned DLT network.
C. open permissionless network.

112. Maxine Carrell, a university professor, made the following statements during a
lecture:

Statement 1:“The capital allocation line joins the optimal risky portfolio and the
risk-free asset.”

Statement 2:“The optimal portfolio for an investor must lie on the capital
allocation line.”

Carrell is most likely correct with respect to:

A. Statement 1 only.
B. Statement 2 only.
C. Statement 1 and Statement 2.

113. Risk infrastructure most likely refers to:

A. The people and systems required to track risk exposures.

B. The top level system of structures, rights and obligations by which
organizations are controlled.
C. The extensions of risk governance into both the day-to-day operation and
decision making processes of the organization.

114. In contrast to open-end funds, a disadvantage of investing in closed-end funds is

that they:

A. have a limited ability to grow.

B. charge fees for investing in and redeeming from the fund.
C. may require the manager to liquidate assets for meeting redemptions at a
point in time when least desirable.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

115. The exhibit below summarizes data concerning annual returns, annual standard
deviation and betas for an investor’s two asset portfolio. The portfolio’s expected
return is equal to 15%.

Exhibit:
Annual Annual Standard
Asset Return (%) Deviation (%) Beta
A 14 10 1.5
B 18 16 0.9

The amount invested in both assets is respectively closest to:

Asset A: Asset B:
A. 17% 83%
B. 42% 58%.
C. 75% 25%.

116. All of the following are applications of distributed ledger technology to

investment management except:

A. tokenization.
B. cryptocurrencies.
C. algorithmic trading.

117. Mitchell Young holds an investment portfolio comprising two equity securities, A
and B. The portfolio is equally invested in the two securities. The exhibit below
summarizes annual risk and return data concerning Young’s portfolio:

Exhibit
Security Annual Annual Standard
Return (%) Deviation (%)
A 22 17
B 16 13

If the covariance of returns between the two securities is – 0.0157, the correlation
between the two securities is closest to:

A. – 0.71.
B. – 0.44.
C. + 0.19.

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 Level I of CFA Program Mock Exam 6 – Questions (PM)

118. The slope of the capital allocation line (CAL) is measured using the:

D. Sharpe ratio.
E. Treynor ratio.
F. information ratio.

119. The exhibit below summarizes risk, return and beta information concerning the
Lightman Foundation’s investment portfolio.

Exhibit:
Annual Standard Weight in
Stock Deviation (%) Beta Portfolio (%)
A 23.5 1.5 25
B 9.4 0.6 30
C 8.5 1.1 10
D 12.5 0.3 35
Total 100

Based on the information presented, portfolio beta is closest to:

A. 0.14.
B. 0.77.
C. 0.87.

120. Tactical asset allocation:

A. focuses on adding portfolio value in the short-run.

B. deviates from policy exposures to nonsystematic risk factors.
C. selects securities with an expected return higher than the asset class
benchmark.

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