Question 1

Which of the following is least likely to be included in the capital budgeting process?
A. Incremental cash flows.
B. Sunk costs.
C. Opportunity costs.

Question 2
Mubs invested in a fund which generated the following returns over the last four years:

Year Assets under management at start of year ($) Net return (%)
1 45 million 25
2 60 million 20
3 50 million -10
4 40 million -8
The money weighted annual return is closest to:

A. 6.75%.
B. 5.58%.
C. 9.00%.

Question 3
A financial analyst is estimating the cost of capital of Acumen Corp. The following information is
provided on primary competitors and their capital structures (in millions):

Competitor Market Value of Debt Market Value of Equity

A 63 101
B 87 113
C 51 119
If the analyst is estimating proportions of debt and equity using the company’s competitors’
capital structure, these proportions will be closest to:

A. wd=0.37, we=0.63
B. wd=0.38, we=0.62
C. wd=0.35, we=0.65

Question 4
The benefits of algorithmic trading are:
A. speed and anonymity but higher transaction costs.
B. best limit or market order and most appropriate trading venue.
C. seeking to earn a profit from investment decisions based on the end of day market
prices.
Question 5
The operating breakeven point is the same as the breakeven point when the degree of financial
leverage (DFL) is:
A. -1.00.
B. 0.00.
C. 1.00.

Question 6
A major supplier of Logs Limited has decided to increase its trade credit terms by fifteen days.
This change is most likely to have the following effect on Logs Limited:
A. Decrease in the company’s cash conversion cycle.
B. Increase in the company’s cash conversion cycle.
C. Decrease in the company’s operating cycle.

Question 7
Ahmer Khan manages a defined benefit plan which has a large number of retirees. The fund is
most likely to have a high need for:
A. liquidity.
B. insurance.
C. income.

Question 8

Which of the following issues discussed at a shareholders’ general meeting would most likely
require only a simple majority vote for approval?

A. Approval of financial statements

B. Voting on a merger
C. Amendments to bylaws

Question 9
Risk budget is least likely measured through:
A. evaluation of risks based on asset classes.
B. risk measures such as standard deviation, beta and value at risk.
C. setting a restriction on the amount of money to be spent on hedging strategies.

Question 10
FarmFresh Dairy has estimated the NPV of the expected cash flows from a new processing plant
to be –USD 0.70 million. The company is evaluating an incremental investment of USD 0.35
million that would allow flexibility to switch to cheaper energy sources. The option to switch to
cheaper sources of energy when they are available has an estimated value of USD 1.40 million.
The value of the new processing plant including this real option to use alternative energy sources
would be:
A. USD 1.05 million
B. USD 0.35 million
 C. USD -2.45 million

Question 11
The following information about a private company and its comparable public entity has been
gathered:

Tax rate Debt-to-equity ratio Equity beta

Private company 40 percent 0.9 n/a
Public company 36 percent 0.5 1.76
The estimated equity beta for the private company, using the pure play method, is closest to:

A. 1.33.
B. 2.05.
C. 2.53

Question 12
A portfolio manager generated a rate of return of 10% on a portfolio with beta of 1.2. If the
risk-free rate of return is 2% and the market return is 8%, Jensen’s alpha for the portfolio is
closest to:
A. 0.5%.
B. 0.8%.
C. 1.1%.

Question 13
A drag on liquidity is least likely when there are:
A. high levels of bad debt expenses.
B. lower number of days of receivables.
C. tighter credits because of expensive short-term debt.

Question 14

Ahmed Nasri, a portfolio manager, works for wealth management department of an international
bank, where he advises high-net-worth clients. He is meeting with a new client, a 45-year-old
lawyer with USD 5 million across various accounts and income of USD 550,000 per annum. The
client has four accounts at four different banks, each with specific sources and uses of funds.

Bank Account Source of Deposit Use of Funds

1 Salary Living Expenses

2 Bonus Vacation and Charity

3 Portfolio Interest Savings for Retirement

4 Portfolio Dividends Parent’s Living Expenses

Based on the above information regarding fund management by the client, he most likely exhibits
the behavioral bias of:

A. mental accounting.
B. availability.
C. conservatism.

Question 15
Which of the following is not a primary responsibility of a board’s compensation committee?
A. Set remuneration policies for directors and key executives.
B. Ensure good corporate governance practices.
C. Develop and oversee the implementation of employee benefit plans.

Question 16
Which of the following is least likely accurate about insurable risks?
A. Insurable risks are typically diversifiable by the insurer.
B. Insurable risks are more costly.
C. Insurable risks have smaller loss limits.

Question 17
A project has the following annual cash flows:

Year 0 1 2 3
Cash Flow ($) -1000 300 603 305
Which discount rate most likely gives a negative net present value?

A. 7%.
B. 9%.
C. 11%.

Question 18
Which of the following is the recommended approach for dealing with flotation costs?
A. Incorporate flotation costs in the cost of capital.
B. Adjust cash flows with the amount of the flotation costs.
C. Ignore flotation costs.

Question 19
Which of the following is least likely a secondary source of liquidity?
 A. Centralized cash management system.
B. Renegotiating debt agreements.
C. Liquidating short term assets.

Question 20
Momentum Oscillators are most likely used to:
A. set the target price.
B. indicate an overbought or oversold position.
C. analyze the movement of price of security with respect to economic changes.

Question 21
A firm’s estimated costs of debt, preferred stock, and common stock are 10%, 15%, and 20%,
respectively. Assuming equal funding from each source and a marginal tax rate of 30%, the
weighted average cost of capital (WAAC) is closest to:
A. 12.67%.
B. 14%.
C. 15%.

Question 22
An ice cream company previously only sold vanilla flavored ice creams. The launch of raspberry
ice cream decreased the demand for vanilla ice creams. This effect is most likely known as a:
A. positive externality.
B. cannibalization.
C. sunk cost.

Question 23
Last year, a portfolio manager earned a return of 15%. The portfolio’s beta was 1.3. For the same
period, the market return was 9% and the average risk-free rate was 5%. Jensen’s alpha for this
portfolio is closest to:
A. 10.2 percent.
B. 4.8 percent.
C. -4.8 percent.

Question 24
A fifteen-year USD1,000 fixed rate non-callable bond with 7% annual coupons currently sells for
USD1,085.45. Assuming a 35% marginal tax rate and an additional risk premium for equity
relative to debt of 3%, the cost of equity using the bond-yield-plus-risk-premium approach is
closest to:
A. 8.06%.
B. 9.11%.
C. 10.05%.
Question 25
Consider the following income statement of a company:

$ (millions)
Revenue 21.8
Variable operating costs 8.9
Fixed operating costs 10.5
Operating income 2.4
Interest 0.9
Taxable income 1.5
Tax 0.8
Net income 0.7
The company’s degree of financial leverage is closest to:

A. 2.5.
B. 1.6.
C. 1.9.

Question 26
Which one of the following statements is most accurate about revolvers?
A. They are the least reliable form of short-term bank borrowing.
B. They are in effect for multiple years.
C. They often used for much smaller amounts.

Question 27
An analyst has made the following return projections. Each of the three possible outcomes have
an equal likelihood of occurrence.

Stock Outcome 1 (%) Outcome 2 (%) Outcome 3 (%) Expected Return (%)
ABC 10 5 0 5
LMN 10 0 5 5
XYZ 0 5 10 5
A perfectly negatively correlated portfolio would most likely consist of stocks:

A. ABC and LMN.

B. ABC and XYZ.
C. LMN and XYZ.
Question 28
Leah’s savings accumulate to USD30,000. She borrows another USD30,000 from her broker and
invests the total of USD60,000 in a stock, the current price of which is USD25 per share. If the
maintenance margin is 35 percent, the first margin call is most likely to occur at:
A. USD19.23.
B. USD12.50.
C. USD16.25.

Question 29
Power Bank would like to use some credit enhancement provisions to reduce the credit risk for
their next bond issue. The bank has two conditions regarding the use of credit enhancements:
1) A downgrade of the credit provider should not have a negative impact on the bond issue
backed by the provider.
2) There should be at least one internal credit enhancement provision.
Which of the following combinations of credit enhancement provisions most likely meets the
bank’s requirements?
A. Credit tranching and cash collateral account.
B. Surety bonds and cash collateral account.
C. Letter of credit and credit tranching.

Question 30
Which of the following index methods is most likely to result in a value tilt?
A. Fundamental weighting.
B. Equal weighting.
C. Market-capitalization weighting.

Question 31
Which of the following statements about sovereign bonds is least likely accurate?
Statement I: Sovereign bonds issued in local currency have a higher rating than those issued in a
foreign currency.
Statement II: A national government has the ability to print currency and hence, it is not restricted
in being able to service its sovereign bonds in any currency.
Statement III: Sovereign bonds are not backed by any collateral but by the taxing authority of the
national government.
A. Statement I.
B. Statement II.
C. Statement III.

Question 32

A hedge fund strategy that entails advocating restructuring, changes in strategy or hiving off
non-profitable units is:

A. short bias.
B. activist.
C. multi-strategy.
Question 33
Which of the following statements about forward contracts is most likely correct?
A. A forward contract requires the backing of a clearinghouse.
B. Forward contracts tend to trade in organized markets.
C. A forward contract can be used to eliminate uncertainty of the future price of an
asset.

Question 34
Chess Inc.’s stock currently trades at a price of USD50 per share. It is expected that after an
announcement, the price would rise to USD52, but it rises up to USD55. This anomaly is most
likely known as:
A. earnings surprise.
B. January effect.
C. overreaction effect.

Question 35
An analyst wants to value an annual coupon pay bond maturing 3 years from now and pays a 5%
coupon. The par value of the bond is USD100. Current spot rate is 2%, 1-year forward rate 1
year from now is 3% and 1-year forward rate 2 years from now is 4%. The value of this annual
coupon pay bond is closest to:
A. USD102.96.
B. USD98.89.
C. USD105.76.

Question 36
Which of the following transactions could potentially have the highest loss?
A. Selling a call option.
B. Selling a put option.
C. Buying a put option.

Question 37
Compared to investing directly in hedge funds, an investor would most likely prefer investing in
fund of hedge funds because:
A. of a simpler fee structure.
B. of unfavorable terms of redemption.
C. of diversified exposure to hedge fund strategies.

Question 38
Which of the following is most likely a reason for companies to issue equity in primary markets?
A. To increase return on equity.
B. To increase return on capital.
C. To raise capital.
Question 39
Which of the following statements about a special purpose vehicle (SPV) is most accurate?
A. The major advantage of a SPV is bankruptcy remoteness.
B. The major advantage of a SPV is beneficial tax treatments.
C. The major advantage of a SPV is lower issuing costs.

Question 40
An analyst has gathered the following data:
• Market value of debt: USD20 million
• Market capitalization: USD55 million
• Cash and short-term investments: USD7.5 million
• EBITDA: USD18 million
• Firm’s marginal tax rate: 32%
The company’s EV/EBITDA multiple is closest to:
A. 3.85.
B. 3.75.
C. 3.38.

Question 41
Which of the following statements about convexity of a bond is most likely correct?
A. An option-free bond has greater convexity than an otherwise identical putable bond.
B. The convexity of a callable bond can be negative at low yields.
C. A bond with a high yield to maturity will have greater convexity than a bond with low
yield to maturity.

Question 42
Analyst 1: Derivative markets exhibit lower volatility as compared to spot markets.

Analyst 2: Derivative markets enable companies to practice risk management more easily.

Which of the following is most likely correct?

A. Only Analyst 1 is correct.

B. Only Analyst 2 is correct.
C. Both Analysts are correct.

Question 43
An investor is least likely to consider adding alternative investments to a traditional investment
portfolio because of their:
A. higher Sharpe ratio.
B. low correlation with traditional investments.
C. historically higher standard deviation of returns.

Question 44
Which of the following is most likely a financial asset?
 A. Currencies.
B. Commodities.
C. Real estate.

Question 45
The default and payment acceleration of cash flows is delayed until a new maturity date in case
of:
A. Hard bullet covered bonds
B. Soft bullet covered bonds
C. Conditional pass-through covered bonds

Question 46
A futures contract:
A. can be settled only by delivery.
B. has a value of zero at initiation of the contract.
C. is a customized contract that satisfies the specific needs of the parties involved.

Question 47
Which of the following is most likely a disadvantage of IPO as an exit strategy for private equity
firms?
A. Opposition by management.
B. Lower levels of disclosure requirements.
C. High transaction costs.

Question 48
An analyst gathers the following information for an equal-weighted index comprised of three
securities:

Security Number of Beginning of End of period Total Dividend

shares period price ($) price ($) ($)
Alpha 100 13 13 3
Beta 350 15 20 6
Gamma 500 25 16 2
The price return of the index is closest to:

A. – 14.4 percent.
B. – 7.6 percent.
C. – 0.9 percent.

Question 49
The repo rate on a repurchase agreement is most likely lower:
 A. for long term agreements as compared to short term agreements.
B. when delivery to the lender is not required.
C. if the underlying security is in great demand.

Question 50
Which of the following statements is least likely a limitation to exploit an arbitrage opportunity?
A. Most investors are risk averse.
B. Transaction costs.
C. Ability to borrow funds.

Question 51

An analyst that is considering risk management measures for alternative investments is least
likely to consider:

A. Calmar ratio.
B. Sharpe ratio.
C. Batting average.

Question 52
In the event of board elections of a company, the type of voting that will be most beneficial to
shareholders with a small number of shares is best described as:
A. cumulative voting.
B. statutory voting.
C. voting by proxy.

Question 53
Given the following information, the estimated spread on a newly issued 5-year, BBB rated
corporate is closest to:

Issue YTM
4-year, US Treasury bond 2.48%
4-year, BBB rated corporate bond 3.65%
6-year, US Treasury bond 3.00%
6-year, BBB rated corporate bond 4.58%
5-year, US Treasury bond 2.73%

A. 2.73%.
B. 1.38%.
C. 4.13%.
Question 54
The economic profit is most likely to be larger for an industry with:
A. high switching costs to customers.
B. low pricing power.
C. standardized products.

Question 55
Consider a CMO structure with one planned amortization class and one support tranche. The
initial PAC collar was 100-250 PSA. If the actual prepayment speed is 300 PSA, the average life
of the PAC tranche will:
A. contract.
B. extend.
C. remain the same.

Question 56
Based on the put call parity relation, which of the following is accurate?
A. The payoff on a long stock can be created with a long call, a long put and a short
position in a risk-free bond.
B. The payoff on a long put can be created with a long call, a short position in a risk-free
bond and a long stock.
C. The payoff on a long call can be created with a long put, a long stock and a short
position in a risk-free bond.

Question 57
An investor seeks the potential for competitive long-term total returns driven by both income
generation and capital appreciation. The investment most likely to achieve the investor’s goals is:
A. private equity.
B. commodities.
C. real estate.

Question 58
The following information on a company is provided:
• Earnings per share (2012): USD2.00
• Dividend payout ratio (2012): 50%
• Dividend growth rate expected during Years 2013 and 2014: 10%
• Dividend growth rate expected after Year 2014: 5%
• Investors’ required rate of return: 12%
Using the two-stage dividend discount model, the value per share of this common stock at the
end of 2012 is closest to:
A. USD15.21.
B. USD16.05.
C. USD16.41.
Question 59
Which of the following statements about market liquidity risk is most likely accurate?
A. Less outstanding debt for an issuer results in lower market liquidity risk.
B. Less outstanding debt for an issuer results in higher market liquidity risk.
C. Lower quality of the issuer results in lower market liquidity risk.

Question 60
Which of the following statements best describes an advantage of a forward contract over a
futures contract?
A. A forward contract is default free.
B. A forward contact allows parties to enter into a customized transaction.
C. A forward contract can easily be offset prior to expiration.

Question 61
A real estate investment fund has a USD100 million initial drawdown structure in its first year and
fully draws this capital to purchase a property. The fund has a soft hurdle preferred return to
investors of 8% per annum and an 80%/20% carried interest incentive split thereafter. At the end
of year two, the property is sold for a total of USD180 million. Total distribution to GP would be:
A. 25.6 million
B. 12.8 million
C. 38.4 million

Question 62
Sofia Santos buys a stock priced at $50 on margin with a leverage ratio of 2.5 and a
maintenance margin of 20%. She will most likely receive a margin call when the stock price is at
or falls just below:
A. $25.0.
B. $32.0.
C. $37.5.

Question 63
Compared to its fundamentally weighted counterpart, a market-value-weighted index will most
likely have a:
A. contrarian effect.
B. momentum effect.
C. value tilt.

Question 64
In an underwritten offering, the investment bank:
A. serves as a broker.
B. takes the risk associated with selling the bond.
C. has less risk than in a best effort offering.
Question 65
Acme Investment Ltd. is a fixed-income investment firm that actively manages a government
bond fund and a corporate bond fund. Government bond fund is mainly invested in medium-term
Treasury securities and highly rated developed-market sovereign issues. The corporate bond
fund is invested in high-yield issues from North American, Asian and African markets.

Which of the following is an appropriate risk measure for Acme’s corporate fund compared to its
government bond fund?

A. Empirical duration.
B. Analytical duration.
C. None of the above.

Question 66
Security markets are generally not strong-form efficient because:
A. insider trading is restricted by regulations.
B. prices automatically reflect any new information in the market
C. change in prices cannot be linked to current information in the market.

Question 67
Mike Weise, CFA, is following a Panache & Co. 6.25%, 3-year, semiannual-pay bond trading at
102.63% of par value. Assuming par value is USD100 and the bond is callable at USD102 in two
years, what is the bond’s yield-to-call?
A. 5.481%.
B. 2.898%.
C. 5.796%.

Question 68
Which of the following best describes the value of a forward contract to a long party?
A. The value of a forward contract at initiation benefits the long party in the contract.
B. The value of a forward contract at expiration is the agreed forward price minus the
spot price.
C. The value of a forward contract is the spot price of the underlying asset minus the
present value of the forward price.

Question 69
When futures prices are lower than the spot price, the commodity forward curve is downward
sloping and prices are referred to as being in:
A. contango.
B. equilibrium.
C. backwardation.
Question 70
A UK-based investor who wishes to invest in depository instruments of non-domestic equity
securities which are not subject to the foreign ownership and capital flow restrictions will most
likely opt for a(an):
A. index-based hedge fund.
B. global depository receipts.
C. American depository receipts.

Question 71
Based on the following ABS structure, what will be the losses to Tranche B in case of a
USD35,000,000 loan default?
• Senior Tranche: USD200,000,000
• Subordinated Tranche A: USD25,000,000
• Subordinated Tranche B: USD25,000,000
• Collateral value: USD285,000,000
A. $0 because senior tranche will absorb the entire loss amount.
B. $25,000,000 because Tranche B will be the first to absorb losses.
C. $0 because the entire loss amount will be absorbed by overcollateralization.

Question 72
Which of the following industries is least likely to be characterized as concentrated with weak
pricing power?
A. Commercial aircraft.
B. Automobiles.
C. Credit Card Networks

Question 73
Company A’s debt was rated BBB by credit rating agencies last year. However, recently company
A’s debt rating has moved down to junk bonds. The least likely reason for this downgrade could
be:
A. that the company issued more debt to finance its operations.
B. the company’s reduced sensitivity to business cycles.
C. that the company acquired some large off-balance-sheet liabilities to run its business.

Question 74
Consider the following information regarding a company’s stock:
• Risk-free rate: 5 percent.
• Market risk premium: 7 percent.
• Stock’s beta: 1.5
• Company’s ROE: 15 percent.
• Expected rate of return: 11 percent.
• Company’s weighted average cost of capital: 13 percent.
Based on this, an investor should most likely:
A. invest in the stock.
B. not invest in the stock as WACC is greater than required rate of return.
C. not invest in the stock.
Question 75
If a bond is callable any time after the call protection period, it is most likely a(n):
A. American style callable bond.
B. European style callable bond.
C. Bermuda style callable bond.

Question 76
Other things being equal, at expiration an American option and a European option:
A. have different values.
B. have the same value.
C. have to be exercised.

Question 77
Giyani Fund of Funds invests EUR150 million in each of Beta Hedge Fund and Delta Hedge
Fund. Giyani FOF has a “2 and 15” fee structure. Management fees and incentive fees are
calculated independently at the end of each year. After one year, net of their respective
management and incentive fees, the investment in Beta is valued at EUR120 million and the
investment in Delta is valued at EUR210 million. The annual return to an investor in Giyani, net of
fees assessed at the fund of funds level, is closest to:
A. 6.30%.
B. 8.63%.
C. 10.00%.

Question 78
Meredith has sold short 200 shares of Cola Inc. at a price of $45 per share. At the same time,
she also placed a “good-till-cancelled, stop 50, limit 60 buy” order. Assuming no transaction
costs, if the stock prices starts to increase rapidly, the maximum possible realized loss is closest
to:
A. $3,000.
B. $2,000.
C. $750.

Question 79
Non-negotiable certificates of deposit most likely:
A. are traded in the open market.
B. are purchased only by retail investors.
C. have a penalty for early withdrawal of funds.

Question 80
In case of futures contracts, the exchange can provide a credit guarantee because:
A. futures markets are heavily regulated.
B. of daily settlement of gains and losses.
C. futures contracts are standardized contracts making them easier to mark to market.
Question 81
Which of the following statements is most likely to be correct about funds of funds?

Statement I: Funds of funds are funds that hold a portfolio of hedge funds.

Statement II: Funds of funds presumably have some expertise in conducting due diligence on
hedge funds.

Statement III: Funds of funds may be able to negotiate better redemption

A. Statements I and II.

B. Statements I and III.
C. Statements I, II, and III.

Question 82
Observed overreactions in securities market are most likely due to:
A. mental accounting.
B. loss aversion.
C. narrow framing.

Question 83
In case of a residential mortgage, the higher the loan-to-value ratio:
A. the higher the homeowner’s equity.
B. the more likely the borrower is to default.
C. the less likely the borrower is to default.

Question 84
An increase in the exercise price will:
A. increase put and call option prices.
B. increase put option prices and decrease call option prices.
C. increase call option prices and decrease put option prices.

Question 85

Which of the following hedge fund strategies is least likely categorized as an event-driven
strategy?

A. Distressed debt.
B. Merger arbitrage.
C. Convertible bond arbitrage.

Question 86
The following data on a company is provided:
• Par value of a perpetual, non-convertible, non callable preferred stock offered at a 5% dividend
rate: USD100
• Company’s sustainable growth rate: 4%
• The required rate of return on similar issues is: 11.5%
• Investor’s marginal tax rate: 30%
The value of the company’s preferred stock is closest to:
A. USD43.48.
B. USD45.26.
C. USD48.35.

Question 87
The duration and convexity of an option-free bond priced at USD95.50 are 8.50 and 85.00,
respectively. If yields increase by 150 bps, the percentage change of the price is closest to:
A. 8.50%.
B. 10.84%.
C. 11.79%.

Question 88
According to the put-call-forward parity, the difference between the price of put and price of call is
most likely equal to:
A. difference between the exercise price and forward price.
B. difference between the exercise price and forward price discounted at the risk-free
rate.
C. sum of the exercise price and forward price discounted at the risk-free rate.

Question 89
An investor considering the enterprise value approach to valuation gathers the following data:
• EBITDA: USD55 million.
• Value of debt: USD70 million
• Value of preferred stock: USD33 million
• Cash & marketable securities: USD14 million
• Number of common shares outstanding: 15 million
• Firm’s tax rate: 32%
• Appropriate EV/EBITDA multiple: 6x
The value per share of the company’s common stock is closest to:
A. $16.07.
B. $20.47.
C. $29.80.

Question 90
Caesar Corp. and Warm Salads Corp. are two major players in the retail food and beverage
industry. In spite of having similar debt/capital ratios, what is the most likely reason the credit
spread of Caesar Corp. is higher than Warm Salads Corp.?
A. Warm Salads Corp. has a higher debt/EBITDA than Caesar Corp.
B. Warm Salads Corp. has a lower EB IT margin than Caesar Corp.
C. Caesar Corp. has a lower FFO/debt ratio than Warm Salads Corp.