Question #1 of 180 Question ID: 1611887

Which of the following statements about the CFA Institute's Professional Conduct
Program (PCP) is least accurate?

Possible sanctions include condemnation by a member’s peers or suspension of a

A)
candidate’s participation in the CFA Program.
If the PCP staff determine that a sanction against a member is warranted, the
B) member must either accept the sanction or lose the right to use the CFA
designation.
Members who cooperate with a PCP inquiry by providing confidential client
C) information to PCP staff are not in violation of Standard III(E) Preservation of
Confidentiality.

Question #2 of 180 Question ID: 1611889

Robert Miguel, CFA, is a portfolio manager. On Saturday, one of his clients invited
Miguel and his wife to be his guests at his luxury suite for a major league baseball
playoff game, which they did. Miguel told his supervisor on Monday that they had
attended the game with the client and that the suite was luxurious. Miguel has:

A) not violated the Standards.

B) violated the Standards because disclosure must be in writing.
C) violated the Standards because he must disclose the gift prior to accepting.

Question #3 of 180 Question ID: 1611900

At his golf club on Saturday morning, Paul Corwin, CFA, sees Frank Roberts, a friend
and institutional client of his, who tells him that he is planning to sell his house on the
7th fairway. While golfing that day, Corwin tells Robert Lowe, a realtor, that Roberts is
planning to sell his house and may need a realtor. He also tells Lowe that he manages
an equities account for Roberts. If Corwin has not received permission from Roberts,
he has violated the Standard on preservation of confidentiality:
A) both by disclosing Roberts’ plan to sell his home and that he is a client.
by disclosing Roberts’ plan to sell his home but not by mentioning that he was a
B)
client.
by disclosing that Roberts is a client of his but not by mentioning Roberts’ plan to sell
C)
his home.

Question #4 of 180 Question ID: 1611891

Doug Watson, CFA, serves in a sales position at Sommerset Brokerage, a registered

investment adviser. Watson frequently drinks excessively. On one occasion, Watson
was cited by local police for misdemeanor public intoxication. According to the
Standard on knowledge of the law and the Standard on misconduct, Watson is in
violation of:

A) both of these Standards.

B) neither of these Standards.
C) only one of these Standards.

Question #5 of 180 Question ID: 1611890

Peter Taylor, a CFA charterholder and a food industry analyst for a large investment
firm, has been invited by Sweet Pineapple Co. to visit the firm's processing plants in
Hawaii. The Standard concerning independence and objectivity recommends that
Taylor:

A) use and pay for commercial transportation, if available.

B) obtain written permission from his employer before he accepts this invitation.
C) decline this invitation if he issues recommendations on the firm’s securities.

Question #6 of 180 Question ID: 1611913

Ruth Brett, a Level I CFA candidate, feels nervous and unprepared the night before the
exam. Brett writes a few key notes on the bottom of her shoe. At the exam, Brett sees
the large number of proctors present and decides not to risk getting caught and does
not look at her shoe. According to the CFA Institute Code of Ethics and Standards of
Professional Conduct, Brett is:

not in violation of any Standard or the Code of Ethics because she did not use the
A)
notes.
in violation of the Code of Ethics for bringing the notes into the examination room
B)
but is not in violation of any Standard because she did not use the notes.
in violation of both the Code of Ethics and the Standard governing conduct as
C) participants in CFA Institute programs for taking the notes into the examination
room.

Question #7 of 180 Question ID: 1611893

Which of the following is least likely included in the CFA Institute Code of Ethics?
Members of CFA Institute must:

A) place their clients’ interests before their employer’s interests.

B) strive to maintain and improve the competence of others in the profession.
C) use reasonable care and exercise independent professional judgment.

Question #8 of 180 Question ID: 1611905

In formulating her report on GammaCorp's common stock, Barb Kramer, CFA, did a
complex series of statistical tests on the company's past sales and earnings. Based on
this statistical study, Kramer stated in her report that, "GammaCorp's earnings growth
for the next five years will average 15% per year." Her conclusion was based in part on
a regression analysis with a high level of statistical significance. Has Kramer violated
the Standard on communication with clients and prospective clients?

A) Yes, because she didn’t give complete details of the statistical model used.
B) Yes, because she failed to indicate that 15% growth is an estimate.
No, because her projections are within the generally accepted bounds of statistical
C)
accuracy.
Question #9 of 180 Question ID: 1611894

Dudley Thompson is a bond salesman for a small broker/dealer in London. His firm is
the lead underwriter on a new junk bond issue for Ibex Corporation, and Thompson
has sent details of the offering to clients. Thompson calls only his accounts over
£1,000,000 for whom he thinks the issue is suitable. Thompson also posts his firm's
optimistic projections for Ibex's performance in several Internet chat rooms.
According to the Standards concerning market manipulation and fair dealing,
Thompson is in violation of:

A) both of these Standards.

B) neither of these Standards.
C) only one of these Standards.

Question #10 of 180 Question ID: 1611908

Rob Elliott, CFA, is an analyst with a large asset management firm. His personal
portfolio includes a large amount of common stock of Tech Inc., a semiconductor
company, which his firm does not currently follow. The director of the research
department has asked Elliott to analyze Tech and write a report about its investment
potential. Based on the CFA Institute Standards of Professional Conduct, the most
appropriate course of action for Elliot is to:

A) decline to write the report.

B) sell his shares of Tech before completing the report.
C) disclose the ownership of the stock to his employer and in the report, if he writes it.

Question #11 of 180 Question ID: 1611895

Angie Franklin, CFA, who covers technology stocks, joins a conference call for analysts
presented by Cynthia Lucas, chief technology officer for LevelTech. Lucas tells the
analysts that overseas shipments of the company's important new product are going
to be delayed due to manufacturing defects, which is new information to the analysts.
After the meeting Franklin changes her rating on LevelTech from "buy" to "hold" and
sends a note to accounts recommending the sale of LevelTech. Franklin:

A) did not violate the Standards.

B) violated the Standard on nonpublic information by revising her rating on LevelTech.
violated the Standard on fair dealing by rating the stock a “hold” but recommending
C)
sale of the shares to her accounts.

Question #12 of 180 Question ID: 1611901

According to the recommended procedures for complying with the Standard on

suitability, which of the following statements regarding an investment policy
statement (IPS) is least accurate?

An IPS should describe the roles and responsibilities of both the adviser and the
A)
client.
A member or candidate is not responsible for financial information withheld by the
B)
client.
A client’s IPS must be updated at least quarterly to reflect any changes in their
C)
investment profile.

Question #13 of 180 Question ID: 1611902

Sue Johnson, CFA, has an elderly client with a very large asset base. The client intends
to start divesting her fortune to various charities. Johnson is on the Board of a local
charitable foundation. Johnson most appropriately:

must not discuss anything regarding her client and her client’s intentions with the
A)
charitable foundation without permission.
can discuss her client’s situation with the charitable foundation as long as she
B)
informs other local charities of her client’s intentions.
 can make this known to the charitable foundation so that they can solicit the client,
C)
since it is the client’s wish to divest assets to charities in the future.

Question #14 of 180 Question ID: 1611896

According to the Standard related to loyalty, prudence, and care, which of the
following statements regarding the voting of proxies on client holdings is least
accurate?

A) Proxies have economic value to a client.

An investment management firm should vote all proxies on client holdings unless
B)
the client reserves that right.
Members and candidates should explicitly disclose the firm’s proxy voting policies to
C)
clients.

Question #15 of 180 Question ID: 1611909

Alvin Gold, CFA, resides in Country T and does business as an investment advisor
primarily in Country U. Country T allows trading on non-public information and does
not require disclosure of referral fees. Country U prohibits trading on non-public
information only if it is gained by illegal means and requires disclosure of referral fees
of over $100 (U.S. equivalent). Gold accepts a referral fee of $75, and in the course of
a meeting with two other analysts and the firm's CFO, Gold receives material non-
public information. To comply with the Code and Standards, Gold:

A) need not disclose the referral fee but cannot trade on the non-public information.
B) must disclose the referral fee and cannot trade on the non-public information.
C) must disclose the referral fee but may trade on the non-public information.

Question #16 of 180 Question ID: 1611914

Which of the following statements made in a marketing brochure is a violation of the

Standards?
 “Roger Langley, Chartered Financial Analyst, has been a portfolio manager for ten
A)
years and passed all three levels of the CFA examinations on his first attempts.”
“Jennifer York has passed the Level II exam and will earn the right to use the CFA
B)
designation after completing the Level III exam this June.”
“Paul Yeng, CFA, has retired from the firm after 25 years of service. Much of the
C) firm’s past success can be attributed to Yeng’s efforts as an analyst and portfolio
manager.”

Question #17 of 180 Question ID: 1611915

Hedge Funds Unlimited, a global hedge fund, has publicly acknowledged in writing
that it has adopted the CFA Institute Code and Standards as its policies. Which of the
following is least likely a violation of the firm's policies?

An analyst at the firm working overseas uses material nonpublic information as

A)
allowed by local law to make investment decisions for discretionary client accounts.
A junior analyst at the firm uses a subscription to his local newspaper and the
B) opinions of his friends and colleagues to make investment recommendations for
discretionary client accounts.
A CFA candidate at the firm, who is registered for the Level III exam, includes
C) reference to participation in the CFA program and her status as a Level III candidate
in her biographical background.

Question #18 of 180 Question ID: 1611910

According to the Code and Standards, members and candidates who are involved in
distributing an initial public offering (IPO) of equity shares and wish to participate in
the IPO:

A) may participate unless the IPO is oversubscribed.

B) may not participate because this creates a conflict of interest.
C) must obtain pre-clearance from a supervisor before participating.
Question #19 of 180 Question ID: 1611903

Linda Bryant, CFA, is an employee of Roomkin Investment House, which underwrites

equity and debt offerings. She has been approached by SimthCo to consult on a
private debt placement. According to CFA Institute Standards of Professional Conduct,
before Bryant agrees to accept this job, she is required to:

A) obtain written consent from Roomkin after submitting details of the arrangement.
B) talk to her immediate supervisor and get her approval to take this consulting job.
inform SimthCo in writing that she will accept the job and provide details of the
C)
arrangement to Roomkin in writing.

Question #20 of 180 Question ID: 1611906

To comply with the Code and Standards, analysts who send research
recommendations to clients must:

A) keep records of all the data and analysis that went into creating the report.
B) send recommendations only to those clients for whom the investments are suitable.
not send recommendations without including the underlying analysis and basic
C)
investment characteristics.

Question #21 of 180 Question ID: 1611904

Amy Brooks, a Level III CFA candidate, has been given supervisory responsibilities. In
carrying out her responsibilities, Brooks has discovered that the firm's compliance
system is inadequate. She informed her supervisor, who is not supportive of Brooks's
efforts to correct the situation. According to CFA Institute Standards of Professional
Conduct, Brooks:

has satisfied her obligation under the Code and Standards by informing her
A)
manager of the situation.
must dissociate herself from the firm if the firm is not in compliance with the CFA
B)
Institute Standards.
should decline in writing to accept supervisory responsibilities until an adequate
C)
compliance system is adopted.
Question #22 of 180 Question ID: 1611916

Excluding the results of terminated accounts when calculating historical performance

is recommended by:

A) both GIPS and the Standard concerning performance presentation.

B) GIPS, but not by the Standard concerning performance presentation.
C) neither GIPS nor the Standard concerning performance presentation.

Question #23 of 180 Question ID: 1611907

Ken Toma, CFA, has just completed an extensive analysis and concluded that the
demand for vacation rentals in Hawaii will far exceed the supply for the foreseeable
future. Toma writes a research report stating, "Based on the fact that the demand for
Hawaiian beach vacations will exceed the supply of rooms for the foreseeable future, I
recommend the purchase of shares of The Hawaiian REIT, a diversified portfolio of
Hawaiian beachfront resorts." If Toma presents this report to his clients, he will most
likely violate the CFA Institute Standards by:

A) not distinguishing between fact and opinion.

B) not considering the suitability of the investment for his clients.
C) failing to have a reasonable and adequate basis for his recommendation.

Question #24 of 180 Question ID: 1611897

Derek Stevens, CFA, manages the pension plan assets of Colors, Inc. When voting
proxies for plan equities, Stevens owes a fiduciary duty to:

A) the plan trustees who hired him.

B) the plan participants and beneficiaries.
C) the managers, stockholders, and bondholders of Colors, Inc., equally.
Question #25 of 180 Question ID: 1611898

An analyst at Romer changes her rating on TelSky from "buy" to "hold" and sends an
email explaining the change to all clients and firm brokers. Subsequently, Paul
Stevens, CFA, a broker at Romer, receives a call from a client who wants to buy 15,000
shares of TelSky. Stevens must:

A) advise his client of the change in recommendation before accepting the order.
not accept the order until the customer has had time to receive and read the new
B)
report.
accept the order without mentioning the ratings change because the order is
C)
unsolicited.

Question #26 of 180 Question ID: 1611888

Which of the following is one of the eight major sections of the GIPS standards for
firms?

A) Independent Third-Party Verification.

B) Input Data and Calculation Methodology.
C) Guidelines for Attributing Performance to Sub-Advisers.

Question #27 of 180 Question ID: 1611899

Edie Pschorr, CFA, notices that a bond is priced at 98.0 in one market and 98.4 in
another market. Pschorr places an order to buy a large number of these bonds in the
first market and simultaneously places an order to sell the same number of bonds in
the second market. The bond's price increases to 98.2 in the first market and
decreases to 98.2 in the second market. Are Pschorr's trades a violation of the Code
and Standards?

A) No.
B) Yes, because they violate the Standard concerning fair dealing.
C) Yes, because they violate the Standard concerning market manipulation.
Question #28 of 180 Question ID: 1611911

Greg Hoffman, CFA, has been offered a cash payment by Hill Manufacturing, Inc. to
write a research report on their company. According to the Code and Standards,
Hoffman:

A) must disclose the nature of the compensation from Hill in his research report.
B) may not accept compensation from Hill to produce research on the company.
may produce the research report but may not make a recommendation on Hill's
C)
securities.

Question #29 of 180 Question ID: 1611912

Shan Ang, CFA, is a portfolio manager at Huang Investments. Lian Jan, an old friend of
Ang's, is an executive recruiter in the same city. Jan proposes that she will refer any
high-level executives that she places locally to Ang, in exchange for one round of golf
at Ang's country club for each new client. According to the Standard concerning
referral fees, Ang would be required to disclose this referral arrangement:

A) only to all prospective clients referred by Jan.

B) to his employer and all prospective clients referred by Jan.
C) to all prospective clients, current clients, and his employer.

Question #30 of 180 Question ID: 1611892

Yvette Michaels, CFA, an analyst for Torborg Investments, inadvertently overhears a

conversation between two executives of Collective Healthcare in which they mention
an upcoming tender offer for Network, a stock she covers. Michaels has followed both
companies extensively and feels their consolidation would be very beneficial for both
companies. She tells her supervisor, a senior analyst, about the proposed tender
offer. Michaels' actions are:

A) in violation of the Standards.

B) not in violation of the Standards because she told only her supervisor.
not in violation of the Standards because she has not traded shares of Network or
C)
changed her report on the company.
Question #31 of 180 Question ID: 1611790

Kimberwick Technologies reported the following information for the year ending
December 31.

Data

Net sales 50,000

Cash expenses 3,250

Cash inputs 17,000

Cash taxes 7,000

Increase in receivables 500

Depreciation expense 1,000

Cash flow from investing -5,000

Cash flow from financing -4,250

If the cash balance increased $13,000 over the year, cash flow from operations (CFO)
is closest to:

A) $21,250.
B) $21,750.
C) $22,250.

Question #32 of 180 Question ID: 1611774

A principal-agent conflict is most likely to occur between:

A) managers and employees.

B) shareholders and senior managers.
C) suppliers and the board of directors.

Question #33 of 180 Question ID: 1611752

A financial firm employs machine learning to model its risk exposures. The machine
identifies a number of risk relationships in the input data, but the firm's management
believes some of these relationships are spurious. If so, it is most likely that the
model:

A) exhibits overfitting.
B) treats true parameters as noise.
C) is not complex enough to describe the data.

Question #34 of 180 Question ID: 1611785

Which of the following statements about a United States public corporation's annual
reports, SEC filings, and press releases is most accurate?

A) Annual and quarterly SEC filings must be audited.

B) Interim SEC filings typically update the major financial statements and footnotes.
Annual reports to shareholders are typically the most factual and objective source of
C)
information about a company.

Question #35 of 180 Question ID: 1611799

Which of the following is most likely a motivation for a company's management to

issue low-quality financial reports?

A) Management has provided optimistic earnings guidance.

B) Oversight provided by the board of directors is weak or inadequate.
C) Accounting principles permit a wide range of acceptable treatments and estimates.

Question #36 of 180 Question ID: 1611741

The initial market value of a portfolio was $100,000. One year later the portfolio was
valued at $90,000 and two years later at $99,000. The geometric mean annual return
excluding any dividend income is closest to:

A) −0.5%.
B) −0.4%.
C) 0.0%.

Question #37 of 180 Question ID: 1611764

Consider the following foreign exchange and interest rate information:

Spot rate: 1.3382 USD/EUR.

One year riskless USD rate = 2.5%.
One year riskless EUR rate = 3.5%.

The one-year arbitrage-free forward exchange rate is closest to:

A) 1.2391 USD/EUR.
B) 1.3253 USD/EUR.
C) 1.3513 USD/EUR.

Question #38 of 180 Question ID: 1611775

A company is most likely to be viewed as having poor liquidity, compared to its

industry, if it has a:

A) low current ratio.

B) low days of payables.
C) high debt-to-equity ratio.

Question #39 of 180 Question ID: 1611793

Haltata Turf & Sod currently uses the first in, first out (FIFO) method to account for
inventory. Due to significant tax-loss carryforwards, the company has an effective tax
rate of zero. Prices are rising and inventory quantities are stable. If the company were
to use last in, first out (LIFO) instead of FIFO:

A) net income would be lower and cash flow would be higher.

B) cash flow would remain the same and working capital would be lower.
C) gross margin would be higher and stockholder’s equity would be lower.

Question #40 of 180 Question ID: 1611753

An analyst is forecasting market shares for the top three firms (which make up 90% of
the market share) in a given market

Scenario Firm Market Share Firm Market Share Firm Market Share

1 Smith 40% Jones 30% Adams 20%

2 Smith 35% Jones 40% Adams 15%

3 Smith 30% Jones 30% Adams 30%

Which scenario produces the highest Herfindahl-Hirschman Index?

A) Scenario 1.
B) Scenario 2.
C) Scenario 3.

Question #41 of 180 Question ID: 1611787

The five steps required for a company to record revenue are least likely to include:

A) identifying a customer contract.

B) receiving proportional payments.
C) identifying separate performance obligations in the contract.

Question #42 of 180 Question ID: 1611777

Nate Kason is a CFO evaluating whether to take on a project which requires a
$100,000 initial investment. Kason's required return for the project is 5.75%, which is
equivalent to the company's weighted average cost of capital. After estimating the
present value of all outflows and inflows, Kason determines the net present value of
the project to be zero. Incorporating the $100,000 initial investment, the internal rate
of return for the project is best described as:

A) below 5.75%.
B) above 5.75%.
C) equal to 5.75%.

Question #43 of 180 Question ID: 1611750

A simple linear regression model produces the following outputs:

Total sum of squares 9,575.81

Mean regression sum of squares 7,115.74

Mean squared error 1,663.46

The F-statistic for this regression is closest to:

A) 1.3.
B) 4.3.
C) 5.8.

Question #44 of 180 Question ID: 1611760

In the context of the tools of geopolitics, voluntary export restraints are best
categorized as:

A) restrictive.
B) cooperative.
C) noncooperative.
Question #45 of 180 Question ID: 1587906

A company's investments in marketable securities include a 3-year tax-exempt bond

measured at amortized cost and a 5-year government note measured at fair value
through other comprehensive income. On its income statement, the company should
report the coupon interest received from:

A) both of these securities.

B) neither of these securities.
C) only one of these securities.

Question #46 of 180 Question ID: 1611759

A central bank's ability to achieve its policy goals is most likely to be limited by
available resources when which of the following actual rates is below its target rate?

A) Interest rate.
B) Inflation rate.
C) Exchange rate.

Question #47 of 180 Question ID: 1611803

Other things equal, for a profitable company, issuing debt to repurchase outstanding
stock will most likely:

A) decrease net income and ROE.

B) increase net income but not necessarily ROE.
C) decrease net income with an indeterminate effect on ROE.

Question #48 of 180 Question ID: 1611783

Under Modigliani and Miller's assumptions and with no taxes, the value of a firm is:
A) unaffected by its capital structure.
B) maximized with an all-debt capital structure.
C) maximized with an all-equity capital structure.

Question #49 of 180 Question ID: 1611782

Conditions that most likely support a high weight of debt in a company's capital
structure include:

A) operating in a cyclical industry.

B) using a subscription-based revenue model.
C) having a high degree of operating leverage.

Question #50 of 180 Question ID: 1611794

From the point of view of a financial analyst, when evaluating companies that use
different inventory cost assumptions, in a period of:

A) stable prices, LIFO inventory is preferred to FIFO inventory.

B) decreasing prices, FIFO inventory is preferred to LIFO inventory.
C) increasing prices, FIFO cost of sales is preferred to LIFO cost of sales.

Question #51 of 180 Question ID: 1611743

An analyst estimates a stock has a 40% probability of earning a 10% return, a 40%
probability of earning a 12.5% return, and a 20% probability of earning a 30% return.
The stock's standard deviation of returns based on this returns model is closest to:

A) 3.74%.
B) 5.75%.
C) 7.58%.
Question #52 of 180 Question ID: 1611744

Shortfall risk is best described as the probability:

A) of a credit rating downgrade due to possible earnings shortfalls.

B) of failing to make a contractually promised payment.
C) that portfolio value will fall below some minimum level at a future date.

Question #53 of 180 Question ID: 1611800

Which of the following is least likely a limitation of mechanisms used to discipline

financial reporting quality?

A) An unqualified audit opinion offers reasonable assurance rather than a guarantee.

Securities regulators may require public disclosure of the results of disciplinary
B)
proceedings.
Loan covenants may give the borrowing company an incentive to manipulate
C)
reported results.

Question #54 of 180 Question ID: 1611791

Given the following common-size cash flow statement:

Cash Flow Statement Extract (Percentage of Revenues)

20X3 20X2

Net income 13.4% 13.4%

Accounts receivable –0.4% –0.5%

Operating cash flow 12.2% 12.8%

Cash from sale of fixed assets 0.7% 0.75%

Purchase of plant and equipment –12.3% –12.0%

Investing cash flow –11.6% –11.3%

Cash dividends –2.1% –2.5%

Total cash flow 1.1% 1.9%

An analyst should most likely conclude that:

A) accounts receivable increased during the year.

B) a smaller dividend was paid in 20X3 than 20X2.
C) financing cash flow for 20X3 was –2.1% of revenue.

Question #55 of 180 Question ID: 1611772

If a company wishes to become public in a way that will generate new capital to fund
several large projects, which of the following mechanisms will be most effective in
providing the capital?

A) Direct listing.
B) Initial public offering.
C) Special purpose acquisition company.

Question #56 of 180 Question ID: 1611802

The presentation format of balance sheet data that standardizes the first-year values
to 1.0 and presents subsequent years' amounts relative to 1.0 is:
A) an indexed balance sheet.
B) a vertical common-size balance sheet.
C) a horizontal common-size balance sheet.

Question #57 of 180 Question ID: 1611797

For 20X1, Belcher Motors reported a decrease in its deferred tax liabilities, a decrease
in its deferred tax assets, and an increase in its valuation allowance. To an analyst, this
would most likely suggest that the company has:

A) decreased its estimate of future profitability.

B) increased the estimated useful life of some capitalized assets.
increased its estimate of the period over which unearned revenue will be
C)
recognized.

Question #58 of 180 Question ID: 1611747

Which of the following statements about hypothesis testing is most accurate?

A) Rejecting a true null hypothesis is a Type I error.

The power of a test is the probability of failing to reject the null hypothesis when it is
B)
false.
For a one-tailed test regarding the value of parameter X, the null hypothesis would
C)
be H0: X = 0, and the alternative hypothesis would be HA: X ≠ 0.

Question #59 of 180 Question ID: 1611784

Agency costs of equity:

A) are unaffected by capital structure.

B) increase with greater debt in the capital structure.
C) decrease with greater debt in the capital structure.
Question #60 of 180 Question ID: 1611745

The bootstrap method of estimating the standard error of sample means involves
drawing repeated samples from a data set, each with:

A) outliers removed.
B) the same sample size.
C) one observation removed.

Question #61 of 180 Question ID: 1611761

An analyst writes the following about two nations:

East Dumerde has a state-dominated domestic economy and conducts little

foreign trade.
West Dumerde uses its large economy and geophysical resource endowment to
discourage other nations from criticizing its human rights record.

In this analyst's opinion, the geopolitics of both East Dumerde and West Dumerde are
most accurately described as:

A) hegemony.
B) nationalism.
C) non-cooperation.

Question #62 of 180 Question ID: 1611789

An analyst gathered the following data about a company:

Collections from customers are $5,000.

Depreciation is $800.
Cash expenses (including taxes) are $2,000.
Tax rate = 30%.
Net cash increased by $1,000.

If inventory increases over the period by $800, cash flow from operations equals:

A) $1,600.
B) $2,400.
C) $3,000.

Question #63 of 180 Question ID: 1611792

Greene Company discloses that its net income for the most recent period was
reduced by a writedown of inventory to net realizable value. What effect is the
inventory writedown most likely to have on Greene's net income in future periods?

A) Increase.
B) Decrease.
C) No effect.

Question #64 of 180 Question ID: 1611756

Automatic stabilizers are government programs that require no legislation and tend
to:

A) automatically increase spending at the same growth rate as real GDP.

B) reduce interest rates, thus stimulating aggregate demand.
C) change the government budget deficit in an opposite direction to economic growth.

Question #65 of 180 Question ID: 1611780

Jay Company is considering a new joint venture with Haiche Company. Each company
would contribute $5 million to the venture in each of the next four years, but at the
end of Year 2, Jay has the right to turn the full venture over to Haiche. Jay should
evaluate this right as:

A) a timing option.
B) a flexibility option.
C) an abandonment option.
Question #66 of 180 Question ID: 1611742

Which of the following statements about return distributions is most accurate?

A) With positive skewness, the median is greater than the mean.

If skewness is positive, the average magnitude of positive deviations from the mean
B)
is smaller than the average magnitude of negative deviations from the mean.
If a return distribution has positive excess kurtosis and the analyst uses statistical
C) models that do not account for the fatter tails, the analyst will underestimate the
likelihood of extreme outcomes.

Question #67 of 180 Question ID: 1611798

Compared to reporting in a country where life insurance payments on key employees

are deductible for tax, a company that makes such payments and reports in a country
in which they are not tax deductible would report:

A) a lower statutory tax rate.

B) a higher effective tax rate.
C) a greater deferred tax asset.

Question #68 of 180 Question ID: 1611765

Assume that the spot exchange rate between the currency of Xyzia (XYZ) and the U.S.
dollar (USD) is 1.264 XYZ/USD, while the spot exchange rate between the euro (EUR)
and the USD is 1.083 EUR/USD. The XYZ/EUR exchange rate is closest to:

A) 0.857.
B) 1.167.
C) 1.369.

Question #69 of 180 Question ID: 1611788

Which of the following is most likely presented on a common-size balance sheet or
common-size income statement?

A) Total asset turnover.

B) Operating profit margin.
C) Return on common equity.

Question #70 of 180 Question ID: 1611749

Ethyl Redd supervises an equity research team. Redd compiles the following
contingency table of recommendations from her fundamental and technical analysts:

Fundamental Analysts

Buy Hold Sell

Buy 28 12 4

Technical Analysts Hold 11 19 7

Sell 6 11 14

Using the data from this contingency table, Redd can most likely test the hypothesis
that her fundamental and technical analysts' recommendations are:

A) independent.
B) uncorrelated.
C) dispersed equally.

Question #71 of 180 Question ID: 1611773

A company has a two-tier structure for its board of directors. In this structure,
independent directors serve on which group within the board?

A) Staggered board.
B) Supervisory board.
C) Management board.

Question #72 of 180 Question ID: 1611763

Three years ago, the U.S. dollar/euro exchange rate was 1.32 USD/EUR. Over the last
three years, the price level in the United States has increased by 18%, and the price
level in the eurozone has increased by 12%. If the current exchange rate is 1.40
USD/EUR, the real exchange rate over the period has:

A) increased, and eurozone goods are now more expensive to U.S. consumers.
B) decreased, and eurozone goods are now more expensive to U.S. consumers.
C) increased, and U.S. goods are now more expensive to eurozone consumers.

Question #73 of 180 Question ID: 1611786

Which of the following items is least likely to contain details about various accruals,
adjustments, balances, and management assumptions?

A) Income statement.
B) Supplementary schedules.
C) Discussion and analysis by management.

Question #74 of 180 Question ID: 1611778

A going concern project has an expected time frame for completion of three years and
a cost of $35 million. To implement a match funding approach, the company should
ensure that:

A) the project is financed with capital that has a three-year life.

B) financing from outside sources provides half of the $35 million cost.
C) it does not proceed with the project until it has secured the $35 million in funding.
Question #75 of 180 Question ID: 1611740

An investment with an initial cost of $30,000 is sold for $60,000 after two years. The
annual return on a continuously compounded basis is closest to:

A) 35%.
B) 38%.
C) 40%.

Question #76 of 180 Question ID: 1611804

In the context of deciding on an appropriate forecast horizon, an inflection point is

best described as a point at which:

A) a full business cycle has been completed.

B) future performance is likely to be different from the past.
C) the analyst will decide whether to hold or remove the investment from the portfolio.

Question #77 of 180 Question ID: 1611779

Wreathfield, Inc., is choosing between two mutually exclusive projects. The cash flows
for the two projects are below. The firm has a cost of capital of 12%, and the risk of
the projects is equivalent to the average risk of the firm.

0 1 2 3 4 5 6

Project J: –12,000 4,000 5,000 6,000

Project K: –20,000 3,000 3,000 3,000 5,000 8,000 8,000

Wreathfield should accept:

A) Project J.
B) Project K.
C) Neither project J nor project K.
Question #78 of 180 Question ID: 1611762

A country has implemented tariffs and import quotas. These policies are most likely to
result in:

A) increased consumer surplus.

B) higher prices for imported goods.
C) decreased domestic quantity supplied.

Question #79 of 180 Question ID: 1611796

A permanent difference between pretax and taxable income is least likely to arise
when a firm:

A) receives tax-exempt interest.

B) uses the installment sales method for financial reporting.
C) pays premiums on life insurance of key employees.

Question #80 of 180 Question ID: 1611795

Clement Company has revalued an intangible asset with an indefinite life upward by
€25 million. In its financial statements, Clement will most likely:

A) disclose how it determined the fair value of the intangible asset.

report lower net income in subsequent periods because of increased amortization
B)
expense on the asset.
report higher assets, net income, and shareholders’ equity in the most recent period
C)
than it would have reported under the cost model.

Question #81 of 180 Question ID: 1611776

In the most recent fiscal year, a company's cash conversion cycle was 45 days. If the
company wishes to improve this measure by 5 days during the current year, they will
most likely focus on increasing their:
A) days sales outstanding.
B) days of inventory on hand.
C) days payables outstanding.

Question #82 of 180 Question ID: 1611751

Partial table of Student's t-distribution:

Level of Significance for a Two-Tailed Test

df 0.20 0.10 0.05 0.02 0.01 0.001

23 1.319 1.714 2.069 2.500 2.807 3.768

24 1.318 1.711 2.064 2.492 2.797 3.745

25 1.316 1.708 2.060 2.485 2.787 3.725

From a sample of 25 paired observations, an analyst generates the simple linear

regression line ˆ
Y = −25 + 49X . The standard error of the forecast is 16. For an
i i

observed value of X equal to 5, a 95% confidence interval for the predicted value of Y
is closest to:

A) 16 to 82.
B) 187 to 253.
C) 218 to 272.

Question #83 of 180 Question ID: 1611746

A researcher has data on the 20 largest firms in each state and samples the data by
choosing 20 states at random and then selecting 10 firms at random from each of the
samples. Her sampling method is referred to as:
A) cluster sampling.
B) convenience sampling.
C) stratified random sampling.

Question #84 of 180 Question ID: 1611801

In a period of rising prices, management of a company that reports under IFRS is least
likely to attempt to influence analysts' opinions of its financial results by:

A) liquidating inventory.
B) increasing the useful lives of assets.
C) emphasizing earnings that exclude nonrecurring costs.

Question #85 of 180 Question ID: 1611754

An unexpected increase in businesses' inventory-to-sales ratios is most likely to occur

as an economy:

A) reaches a trough.
B) enters a contraction phase.
C) approaches the peak of an expansion.

Question #86 of 180 Question ID: 1611755

Relative to economic cycles, credit cycles:

A) coincide with economic cycles.

B) tend to dampen economic cycles.
C) have historically been longer than economic cycles.

Question #87 of 180 Question ID: 1611758

A change from a neutral monetary policy to a contractionary monetary policy is most
likely to be reflected in the economy by:

A) decreases in price for financial assets.

B) decreased lending rates in the banking system.
C) depreciation of the domestic currency in the foreign exchange market.

Question #88 of 180 Question ID: 1611748

Which is the correct test statistic for a test of the null hypothesis that a population
variance is equal to a chosen value?

A) F-statistic.
B) t-statistic.
C) Chi-square statistic.

Question #89 of 180 Question ID: 1611781

Timely Taxis, Ltd. has signed a long-term lease for 20 underground parking spots at
$150 each per month for its fleet of taxis. The firm currently has 18 taxis in operation
and is performing an NPV analysis on the purchase of a 19th taxi. The cost of parking
for the 19th taxi is best described as:

A) a sunk cost.
B) an opportunity cost.
C) an incremental cost.

Question #90 of 180 Question ID: 1611757

Which of the following conditions is most likely to result in expansionary effects from
fiscal policy being felt when an economic expansion is already underway?

Slow economic growth is being caused by supply shortages rather than low
A)
aggregate demand.
 Expansionary fiscal policy requires policymakers to recognize an economic
B)
contraction and enact legislation.
Government borrowing to finance expansionary spending is increasing interest rates
C)
faced by private sector borrowers.

Question #91 of 180 Question ID: 1611862

A hedge fund has a hurdle rate of 6% and generates a positive return of 10% for the
year. The performance fee is 15% of gains. The performance fee will equal:

A) 0.6% if the hurdle rate is hard.

B) 0.9% if the hurdle rate is soft.
C) 1.2% whether the hurdle rate is hard or soft.

Question #92 of 180 Question ID: 1611849

FQ Corporation currently has EUR 40 million par value second lien bonds outstanding.
Investors in FQ's new EUR 10 million senior unsecured bonds would:

A) be senior in priority to the second lien bonds.

B) rank pari passu in priority to the second lien bonds.
C) be subordinated in priority to the second lien bonds.

Question #93 of 180 Question ID: 1611813

Mark Stewart is an executive of a publicly traded company in a country that has weak
insider trading regulations. If Stewart can trade on insider information about his
company and earn abnormal returns over time, the country's market may be most
accurately characterized as:

A) not weak-form efficient.

B) not strong-form efficient.
C) semi-strong-form efficient.
Question #94 of 180 Question ID: 1611884

If a company's forecast current liability balances reflect an undesirable net working

capital position, the company is most likely faced with:

A) solvency risk.
B) accounting risk.
C) operational risk.

Question #95 of 180 Question ID: 1611837

Annual spot interest rates are as follows:

1-year: 3.5%
2-year: 3.7%
3-year: 4.0%
4-year: 4.2%

Based on these spot rates, the 4-year par rate is closest to:

A) 3.92%.
B) 4.05%.
C) 4.18%.

Question #96 of 180 Question ID: 1611767

A portfolio is invested 30% in Asset X with the remainder invested in Asset Y. Asset X
has an expected return of 6% and variance of returns of 0.031, while Asset Y has an
expected return of 7% and variance of returns of 0.045. The covariance between the
returns of the two assets is 0.03735. The standard deviation of returns for the
portfolio is closest to:

A) 18%.
B) 20%.
C) 22%.
Question #97 of 180 Question ID: 1611867

Benefits of private debt investments most likely include:

A) minimal liquidity risk.

B) stability from fixed coupon rates.
C) low correlations of returns with other investments.

Question #98 of 180 Question ID: 1611851

In a derivatives contract that is subject to novation:

A) the seller is required to own and hold the underlying.

B) either counterparty may exit the contract by paying a stated fee.
a central clearinghouse takes the opposite positions to both the buyer and the
C)
seller.

Question #99 of 180 Question ID: 1611831

A borrower under a repurchase (repo) transaction would like to borrow exactly

$100,000. If the repo haircut is 3%, the borrower must provide as collateral bonds
worth:

A) less than $103,000.

B) exactly $103,000.
C) more than $103,000.

Question #100 of 180 Question ID: 1611869

Which of the following real estate investment vehicles or strategies is most likely to
provide a risk-return profile similar to that of equity investments?

A) Core strategies.
B) Value-add strategies.
C) Investment grade commercial MBS.

Question #101 of 180 Question ID: 1611821

Assuming a forecast object will converge to a historical base rate is most appropriate
for:

A) mature industries.
B) cyclical industries.
C) growth industries.

Question #102 of 180 Question ID: 1611885

A manager states that the objectives of a firm's risk management process should be
to:

Identify the firm's risk tolerance.

Identify and measure risks faced by the organization.
Minimize or eliminate these risks.

Which of these objectives is least appropriate in a risk management process?

A) Identifying risk tolerance.

B) Identifying and measuring risks.
C) Minimizing or eliminating risks.

Question #103 of 180 Question ID: 1611842

Other things equal, a fixed-coupon bond will have less convexity when its:

A) coupon rate is lower.

B) yield to maturity is lower.
C) time to maturity is shorter.
Question #104 of 180 Question ID: 1611820

An industry is experiencing a significant increase of unionized labor. In the context of

Porter's Five Forces, this change most likely implies:

A) decreasing threat of new entrants.

B) increasing bargaining power of suppliers.
C) decreasing bargaining power of customers.

Question #105 of 180 Question ID: 1611880

Which of the following statements is most accurate regarding a core-satellite

approach to asset allocation?

Both the core and satellite portfolios utilize active strategies designed to reduce
A)
excessive trading.
Passively managed indexes are used for the core portfolio and active strategies are
B)
used for the satellite portfolio.
Active strategies are used for the core portfolio and passively managed strategies
C)
are used for the satellite portfolio.

Question #106 of 180 Question ID: 1611835

Bond 1 is an option-free, 3% semiannual coupon, 5-year bond. Bond 2 is a callable

bond that is otherwise identical to Bond 1. Compared to Bond 1, Bond 2 has a(n):

A) lower option-adjusted price.

B) equal option-adjusted price.
C) higher option-adjusted price.

Question #107 of 180 Question ID: 1611870

Among real estate investment forms, a mortgage REIT is most accurately described as
a(n):

A) equity investment.
B) public debt investment.
C) private debt investment.

Question #108 of 180 Question ID: 1611882

Stanley Park has allocated his funds across many different retirement and
nonretirement accounts. His investment objectives are varied and include some key
short-term objectives and some desired but not mandatory long-term ones. Park has
set aside specific financial assets for each objective. Park has had success in his
investment decisions for three decades and believes he can continue to earn
reasonable results. Park most likely exhibits:

A) framing bias.
B) overconfidence.
C) mental accounting.

Question #109 of 180 Question ID: 1611874

The source of a hedge fund's return that is attributable to security selection is best
described as:

A) alpha.
B) market beta.
C) strategy beta.

Question #110 of 180 Question ID: 1611877

Under which type of pension plan are retirement benefit payments an obligation of
the sponsoring firm?

A) Defined benefit plan only.

B) Defined contribution plan only.
C) Both a defined benefit plan and a defined contribution plan.

Question #111 of 180 Question ID: 1611853

If the availability of a physical commodity over the period of a forward contract has
value to users of the commodity, the commodity is said to provide:

A) storage yield.
B) economic yield.
C) convenience yield.

Question #112 of 180 Question ID: 1611872

An increase in which of the following will decrease the net cost of carry for a
commodity?

A) Storage cost.
B) Convenience yield.
C) The risk-free interest rate.

Question #113 of 180 Question ID: 1611878

A portfolio manager is most likely to complete a top-down analysis of the investment

environment in which step of the portfolio management process?

A) Planning.
B) Execution.
C) Feedback.

Question #114 of 180 Question ID: 1611846

Changes in a fixed-coupon bond's cash flows that result from changes in yield would
be reflected in the bond's:

A) effective duration.
B) modified duration.
C) Macaulay duration.

Question #115 of 180 Question ID: 1611805

A securities transaction is said to take place in the primary market if the security:

A) is newly issued.
B) has an investment-grade rating.
C) trades on an organized exchange.

Question #116 of 180 Question ID: 1611770

An analyst gathered the following data about three stocks:

Stock Beta Estimated Return

A 1.5 18.1%

B 1.1 15.7%

C 0.6 12.5%

If the risk-free rate is 8%, and the market risk premium is 7%, the analyst is least likely
to recommend buying:

A) Stock A.
B) Stock B.
C) Stock C.

Question #117 of 180 Question ID: 1611848

A Canadian city issues a CAD 100 million general obligation bond. Which of the
following credit measures is most relevant in analyzing the risk of this bond?

A) Minimum coverage ratio covenants.

B) Attractiveness of the local business climate.
C) Riskiness of cash flows from infrastructure funded by the bonds.

Question #118 of 180 Question ID: 1611873

In explaining the merits of natural resource investments such as raw land, timberland,
and farmland to her clients, a financial advisor can most accurately state that:

A) farmland is typically held by institutions.

B) liquidity is a primary concern for all three investments.
C) farmland lot sizes are usually bigger than timberland lot sizes.

Question #119 of 180 Question ID: 1611876

What is the main benefit of a permissionless network, in contrast with a permissioned

network? A permissionless network:

A) is more cost efficient.

B) has no single point of failure.
C) enables faster transfer of ownership.

Question #120 of 180 Question ID: 1611768

For a stock that has a beta of 0.95, it is most likely that:

A) the slope of its characteristic line is 0.95.

B) the market is 95% as volatile as this individual stock.
the variance of the market return is 95% of the covariance of the stock’s return with
C)
the market return.
Question #121 of 180 Question ID: 1611832

A hedge fund manager is estimating a value for a non-traded bond of Yoder Company.
The bond has an annual-pay 6% coupon, matures in six years, and has a CCC credit
rating. Actively traded annual-pay bonds with similar credit ratings include the
following:

Coupon Maturity Yield to maturity

8% 5 years 9.45%

5% 5 years 9.55%

7% 10 years 10.00%

Based on matrix pricing, the value of the Yoder bond as a percentage of par is closest
to:

A) 83.9.
B) 84.1.
C) 84.5.

Question #122 of 180 Question ID: 1611819

An analyst is most likely to examine a company's channel strategy when evaluating the
company's:

A) pricing power.
B) business model.
C) revenue drivers.

Question #123 of 180 Question ID: 1611886

In the context of risk management, entering an interest rate swap is an example of:

A) risk shifting.
B) risk transfer.
C) diversification.
Question #124 of 180 Question ID: 1611822

An analyst determines that a company has a return on equity of 16% and pays 40% of
its earnings in dividends. If the firm recently paid a $1.50 dividend and the stock is
selling for $40, what is the required rate of return on the stock if it is priced according
to the dividend discount model?

A) 9.6%.
B) 10.2%.
C) 13.7%.

Question #125 of 180 Question ID: 1611833

A 7.5% coupon, semiannual-pay, five-year bond has a yield to maturity of 6.80%. Over
the next year, if the bond's yield to maturity remains unchanged, its price will:

A) increase.
B) decrease.
C) remain unchanged.

Question #126 of 180 Question ID: 1611807

A securities market exhibits operational efficiency if it offers:

A) low transaction costs.

B) prices that respond rapidly to new information.
C) rates of return that are proportional to risk on average.

Question #127 of 180 Question ID: 1611863

Co-investing is most accurately described as investing:

 as a limited partner in an investment fund, but only committing capital to one or
A)
more of the fund’s portfolio companies.
directly in one or more of an investment fund’s portfolio companies, instead of
B)
investing as a limited partner in the fund.
directly in one or more of an investment fund’s portfolio companies, in addition to
C)
investing as a limited partner in the fund.

Question #128 of 180 Question ID: 1611854

Other things equal, the value of a long position in a forward contract priced at F(0)T
will most likely be higher during its life at time t if the:

A) risk-free rate is higher.

B) costs of holding the underlying are lower.
C) benefits of holding the underlying are higher.

Question #129 of 180 Question ID: 1611806

An investor buys a stock for $50. The initial margin requirement is 50%, and the
maintenance margin requirement is 25%. The price below which the investor would
receive a margin call would be:

A) $25.00.
B) $33.33.
C) $37.50.

Question #130 of 180 Question ID: 1611823

Pat McCoy is analyzing a technology firm that has experienced annual earnings growth
of 12%. McCoy does not expect the firm to begin paying dividends on its common
shares in the foreseeable future. To estimate the value of this firm's common shares,
McCoy should most appropriately use:

A) a two-stage DDM.
B) a free cash flow model.
C) a Gordon growth model.

Question #131 of 180 Question ID: 1611847

The type of credit risk that is most directly reflected in a bond's rating is:

A) default risk.
B) downgrade risk.
C) credit spread risk.

Question #132 of 180 Question ID: 1611843

Portfolio duration most accurately approximates the sensitivity of the value of a bond
portfolio to:

A) parallel shifts in the yield curve.

B) increases in the slope of the yield curve.
C) decreases in the slope of the yield curve.

Question #133 of 180 Question ID: 1611865

A university endowment commits $80 million to Lawson Private Capital Fund. Lawson
charges a 1% management fee per year and incentive fees of 20% on all gains, and has
an American-style waterfall structure with no clawback. Lawson draws down the
endowment's capital to invest in the following portfolio companies:

Portfolio company Investment Cash received on exit

Adams $20 million in Year 1 $30 million in Year 3

Borland $25 million in Year 2 $45 million in Year 4

Chambers $30 million in Year 3 $20 million in Year 5

At the end of Year 5, the investor's total gain after fees is closest to:

A) $10 million.
B) $12 million.
C) $14 million.

Question #134 of 180 Question ID: 1611809

A stock index consists of two stocks. As of January 1:

Company A has 50 shares outstanding valued at $2 each.

Company B has 10 shares outstanding valued at $10 each.
The price-weighted index is 6, and the value-weighted index is 100.

On June 30, the price of Company A's stock has increased to $4 per share. Effective the
morning of July 1, Company B's stock splits two- for-one and is priced at $5. The
opening values of the price-weighted index and the value-weighted index on July 1
are:

Price-weighted Value-weighted

A) 7 150

B) 7 125
C) 4.5 150

Question #135 of 180 Question ID: 1611814

The assertion that investors, analysts, and portfolio managers exhibit psychological
tendencies that cause them to make systematic errors is most consistent with:

A) behavioral finance.
B) weak-form market efficiency.
C) fundamental analysis.

Question #136 of 180 Question ID: 1608860

Open-end mutual funds differ from closed-end funds in that:

A) open-end funds stand ready to redeem their shares, while closed-end funds do not.
B) closed-end funds require active management, while open-end funds do not.
open-end funds issue shares that are then traded in secondary markets, while
C)
closed-end funds do not.

Question #137 of 180 Question ID: 1611841

An 8%, semiannual pay, option-free corporate bond that is selling at par has ten years
to maturity. What is the approximate modified duration of the bond based on a 75
basis point change (up or down) in rates?

A) 5.6.
B) 6.8.
C) 7.2.

Question #138 of 180 Question ID: 1611856

Reasons why no-arbitrage pricing models for forward commitments differ from no-
arbitrage pricing models for contingent claims least likely include the fact that
contingent claims:

A) are leveraged.
B) have one-sided payoffs.
C) have nonzero values at initiation.

Question #139 of 180 Question ID: 1611857

During the life of an option, the amount by which its price is greater than its exercise
value is most accurately described as its:

A) time value.
B) moneyness.
C) intrinsic value.

Question #140 of 180 Question ID: 1611836

A bond with nine years to maturity is quoted at an interpolated spread of +150 basis
points. The benchmark yield for this bond is:

A) a swap rate.
B) a matrix rate.
C) a government bond yield.

Question #141 of 180 Question ID: 1611810

An investor purchases 1,000 shares of each of the stocks in a price-weighted index at

their closing prices (ignore transactions costs). On a total return basis, if the index
stocks remain the same, this portfolio will most likely:

A) perform exactly like the index over time.

B) outperform the index over time.
C) underperform the index over time.
Question #142 of 180 Question ID: 1611825

Among valuation models, the difficulty of estimating a required rate of return is most
likely to be a disadvantage of using:

A) a Gordon growth model.

B) an asset-based valuation model.
C) an enterprise value multiplier model.

Question #143 of 180 Question ID: 1611816

An investor owns preference shares which stipulate that any dividend for the current
period, as well as all past dividends, must be fully paid before a common stock
dividend may be paid. This security is best described as:

A) full-pay preferred.
B) restricted preferred.
C) cumulative preferred.

Question #144 of 180 Question ID: 1611844

Consider two option-free, 5% annual-pay bonds from the same issuer and with the
same seniority. One of the bonds has a modified duration of 3.5 and approximate
convexity of 15. The other has a modified duration of 8.5 and approximate convexity
of 75. Can the lower-duration bond have more price volatility than the higher-duration
bond?

A) No, because it also exhibits lower convexity.

B) Yes, because shifts in the yield curve may be non-parallel.
C) No, because its price will respond relatively less in response to changes in yield.

Question #145 of 180 Question ID: 1611868

When the management team of a public company is replaced by the private equity
manager in a leveraged buyout (LBO) fund, the type of LBO is best described as a(n):

A) activist shareholder.
B) management buy-in.
C) management buyout.

Question #146 of 180 Question ID: 1611860

Which of the following portfolios has the same future cash flows as a put option?

A) Long call option, long risk-free bond, short underlying asset.

B) Long call option, short risk-free bond, long underlying asset.
C) Short call option, long risk-free bond, long underlying asset.

Question #147 of 180 Question ID: 1611881

Marcia Kostner, CFA, is an advisor to individual investors. To determine each of her

clients' risk tolerance objectively, Kostner uses a mathematical formula with inputs
that include the client's age, family size, insurance coverage, liquidity, income, and net
worth. What is the most likely shortcoming of Kostner's approach to assessing risk
tolerance?

A) Net worth is unrelated to an investor’s risk tolerance.

B) This approach does not consider the investor’s attitude toward risk.
C) Treating clients differently based on their ages violates the Code and Standards.

Question #148 of 180 Question ID: 1611850

A 10-year note issued by Gaullic Finance will be paid from a bankruptcy-remote pool
of Gaullic's balance sheet assets. These notes are best described as:

A) covered bonds.
B) securitized bonds.
C) asset-backed bonds.
Question #149 of 180 Question ID: 1611766

With expected return on the Y-axis (vertical) and portfolio risk as measured by
standard deviation on the X-axis (horizontal), a risk-averse investor's indifference
curves will:

A) be flat.
B) curve upward.
C) curve downward.

Question #150 of 180 Question ID: 1611826

An analyst gathered the following data about a company:

The historical earnings retention rate of 40% is projected to continue into the
future.
The sustainable ROE is 12%.
The stock's beta is 1.2.
The nominal risk-free rate is 6%.
The expected market return is 11%.

If the analyst believes next year's earnings will be $4 per share, what value should be
placed on this stock?

A) $22.24.
B) $33.32.
C) $45.45.

Question #151 of 180 Question ID: 1611817

The type of equity depository receipt that gives its owners the right to vote and
receive dividends from a company's shares is best described as:

A) a global depository receipt.

B) a sponsored depository receipt.
C) a fully-owned depository receipt.
Question #152 of 180 Question ID: 1611838

Consider the following Treasury spot rates expressed as bond equivalent yields:

Maturity Spot Rate

6 months 3.0%

1 year 3.5%

1.5 years 4.0%

2 years 4.5%

If a Treasury note with two years remaining to maturity has a 5% semiannual coupon
and is priced at $1,008, the note is:

A) overpriced.
B) underpriced.
C) correctly priced.

Question #153 of 180 Question ID: 1611828

Which of the following is an advantage of a callable bond (compared to an identical

option-free bond) to an investor?

A) Less reinvestment risk.

B) Higher yield.
C) More convexity.

Question #154 of 180 Question ID: 1611858

An increase in the risk-free rate, together with an increase in the expected volatility of
the price of the underlying asset, will most likely lead to a gain for a:

A) long call option.

B) long put option.
C) short put option.
Question #155 of 180 Question ID: 1611771

The risk-free rate is 5% and the expected market risk premium is 10%. A portfolio
manager is projecting a return of 20% on a portfolio with a beta of 1.5. After adjusting
for its systematic risk, this portfolio is expected to:

A) equal the market’s performance.

B) outperform the market.
C) underperform the market.

Question #156 of 180 Question ID: 1611866

Which measure of return is most appropriate for investments with cash flows that
may vary in their timing and amounts?

A) Multiple of invested capital.

B) Time-weighted rate of return.
C) Internal rate of return over the investment’s life.

Question #157 of 180 Question ID: 1611834

The full price of a bond:

A) includes accrued interest.

B) includes commissions and taxes.
C) is also known as the “clean” price.

Question #158 of 180 Question ID: 1611829

Which of the following is a disadvantage to bondholders if a bond has a sinking fund

provision?

A) Lower credit quality.

B) Unfavorable tax status.
C) Greater reinvestment risk.

Question #159 of 180 Question ID: 1608855

Which of the following statements about the security market line (SML) and capital
market line (CML) is most accurate?

A) The SML involves the concept of a risk-free asset, but the CML does not.
B) The SML uses beta, but the CML uses standard deviation as the risk measure.
C) Both the SML and CML can be used to explain a stock’s expected return.

Question #160 of 180 Question ID: 1611811

The type of equity index most likely to require rebalancing is:

A) a price-weighted index.
B) an equal-weighted index.
C) a market-capitalization index.

Question #161 of 180 Question ID: 1611859

The derivative that is least likely to have a value of zero at initiation is:

A) a credit default swap.

B) a forward rate agreement.
C) an at-the-money call option.

Question #162 of 180 Question ID: 1611883

A distinction between cognitive errors and emotional biases is that cognitive errors:
A) are more likely to be mitigated through education than emotional biases.
are essentially processing errors, while emotional biases tend to involve belief
B)
perseverance.
typically lead to errors of commission, while emotional biases typically lead to errors
C)
of omission.

Question #163 of 180 Question ID: 1611818

The change in the intrinsic value of a firm's common stock resulting from an increase
in ROE most likely:

A) increases the stock’s intrinsic value.

B) decreases the stock’s intrinsic value.
C) depends on the reason for the increase in ROE.

Question #164 of 180 Question ID: 1611815

Which of the following statements about short-selling equity shares is least accurate?

A) A short seller is required to set up a margin account.

B) A short sale involves securities the investor does not own.
C) A short seller loses if the price of the stock sold short decreases.

Question #165 of 180 Question ID: 1611845

For a bond currently priced at $1,018 with an effective duration of 7.48, if the market
yield moved down 75 basis points, the new price would be approximately:

A) $961.
B) $1,075.
C) $1,094.
Question #166 of 180 Question ID: 1611830

A public offering of bonds issued over a period of time is most accurately described
as:

A) a serial structure.
B) a shelf registration.
C) a waterfall structure.

Question #167 of 180 Question ID: 1611861

The put-call-forward parity relationship is similar to the standard put-call parity

relationship with a forward price substituted for:

A) the risk-free bond.

B) the underlying asset.
C) either the call or put option.

Question #168 of 180 Question ID: 1611875

A hedge fund uses derivative positions to take a long position in the Japanese yen and
a short position in the euro. The classification of this hedge fund is most likely:

A) an event-driven fund.
B) a macro strategy fund.
C) a quantitative directional fund.

Question #169 of 180 Question ID: 1611812

Compared to an index of 100 U.S. exchange-traded stocks, an index of 100 U.S.

government and corporate bonds will most likely:

A) reflect equally timely price data.

B) be more difficult to build and maintain.
C) have less turnover among the securities in the index.
Question #170 of 180 Question ID: 1611839

The minimum data required to calculate the implied forward rate for three years
beginning three years from now is:

A) the 3-year and 6-year spot rates.

B) the 4-year, 5-year, and 6-year spot rates.
C) spot rates at 1-year intervals for the 6-year period.

Question #171 of 180 Question ID: 1611769

In a two-asset portfolio where 20% is invested in the risk-free asset, the standard
deviation of the portfolio will be:

A) 80% of the standard deviation of the risky asset.

B) less than 80% of the standard deviation of the risky asset.
C) more than 80% of the standard deviations of the risky asset.

Question #172 of 180 Question ID: 1611879

Which of the following types of institutions is most likely to have the lowest risk
tolerance?

A) Commercial bank.
B) College endowment.
C) Mutual fund company.

Question #173 of 180 Question ID: 1611852

Consider an investor who has sold a cash-settled call option at $39 on 100 shares of
General Industry at a price of $5. If the share price is $41 at expiration, the investor
will have a:
A) loss of $300.
B) profit of $300.
C) payoff of $300.

Question #174 of 180 Question ID: 1611824

An analyst gathered the following data about a company:

A historical earnings retention rate of 60% that is projected to continue into the
future.
A sustainable return on equity of 10%.
A beta of 1.0.
The nominal risk-free rate is 5%.
The expected market return is 10%.

If next year's EPS is $2 per share, what value should be estimated for this stock?

A) $20.00.
B) $30.50.
C) $35.45.

Question #175 of 180 Question ID: 1611827

Acquire Corp. has a business model based on making accretive acquisitions each year.
The company has historically been successful in implementing its strategy. Earnings
per share have grown each of the last five years at a 15% compounded rate. Acquire's
two primary business segments are engineering construction and mining. During the
past year, Acquire purchased a services company with large net operating losses. The
purchase price was one-half the company's current market value. The most
appropriate technique to value Acquire is based on its:

A) price-to-book value ratio.

B) forward price-to-earnings ratio.
C) trailing price-to-sales ratio.
Question #176 of 180 Question ID: 1611855

A 60-day forward rate agreement (FRA) on a 60-day market reference rate has a fixed
rate of 6%. If, at the initiation of the contract, the market reference rate is 5%, the
payment in 60 days:

A) is unknown.
B) will be received by the long position.
C) will be received by the short position.

Question #177 of 180 Question ID: 1611864

A characteristic of alternative investments that distinguishes them from traditional

investments is that:

A) redemptions are more restricted.

B) they are subject to stricter regulations.
C) managers hold more diversified portfolios.

Question #178 of 180 Question ID: 1611840

A 3-year, 6% coupon, semiannual-pay note has a yield to maturity of 5.5%. If an

investor holds this note to maturity and earns a 4.5% return on reinvested coupon
income, his realized yield on the note is closest to:

A) 5.46%.
B) 5.57%.
C) 5.68%.

Question #179 of 180 Question ID: 1611871

Public-private partnerships are most likely to be a vehicle for investing in:

A) tangible collectibles.
B) distressed securities.
C) greenfield infrastructure.

Question #180 of 180 Question ID: 1611808

Liquidity is generally supplied by dealers in:

A) a brokered market.
B) an order-driven market.
C) a quote-driven market.
Question #1 of 180 Question ID: 1611887

Which of the following statements about the CFA Institute's Professional Conduct
Program (PCP) is least accurate?

Possible sanctions include condemnation by a member’s peers or suspension of a

A)
candidate’s participation in the CFA Program.
If the PCP staff determine that a sanction against a member is warranted,
B) the member must either accept the sanction or lose the right to use the
CFA designation.
Members who cooperate with a PCP inquiry by providing confidential client
C) information to PCP staff are not in violation of Standard III(E) Preservation of
Confidentiality.
Explanation
Members can accept or reject a disciplinary sanction proposed by the Professional
Conduct Program staff. If the member rejects the sanction, the matter is referred to
a hearing before a disciplinary review panel of CFA Institute members. The other
statements are accurate.
(Module 90.1, LOS 90.a)

Question #2 of 180 Question ID: 1611889

Robert Miguel, CFA, is a portfolio manager. On Saturday, one of his clients invited
Miguel and his wife to be his guests at his luxury suite for a major league baseball
playoff game, which they did. Miguel told his supervisor on Monday that they had
attended the game with the client and that the suite was luxurious. Miguel has:

A) not violated the Standards.

B) violated the Standards because disclosure must be in writing.
C) violated the Standards because he must disclose the gift prior to accepting.
Explanation
In this case, Miguel has not violated the standards. For a gift from a client in
appreciation of past service or performance, informing his supervisor verbally is
sufficient. Standard I(B) Independence and Objectivity requires disclosure prior to
accepting the gift "when possible," but in cases such as this when there is short
notice, notification afterward is permitted.
(Module 90.1, LOS 90.b, 90.c; Module 91.1, LOS 91.a, 91.b, 91.c; and Module 93.1,
LOS 93.a, 93.b)

Question #3 of 180 Question ID: 1611900

At his golf club on Saturday morning, Paul Corwin, CFA, sees Frank Roberts, a friend
and institutional client of his, who tells him that he is planning to sell his house on the
7th fairway. While golfing that day, Corwin tells Robert Lowe, a realtor, that Roberts is
planning to sell his house and may need a realtor. He also tells Lowe that he manages
an equities account for Roberts. If Corwin has not received permission from Roberts,
he has violated the Standard on preservation of confidentiality:

A) both by disclosing Roberts’ plan to sell his home and that he is a client.
by disclosing Roberts’ plan to sell his home but not by mentioning that he was a
B)
client.
by disclosing that Roberts is a client of his but not by mentioning Roberts’
C)
plan to sell his home.
Explanation
Corwin violated Standard III(E) Preservation of Confidentiality by revealing his
business relationship with Roberts without permission. Because the information
that Roberts' plans to sell his home is not received as part of his professional
relationship with Roberts, it is not covered by the Standard.
(Module 90.1, LOS 90.b, 90.c; Module 91.5, LOS 91.a, 91.b, 91.c; and Module 93.1,
LOS 93.a, 93.b)

Question #4 of 180 Question ID: 1611891

Doug Watson, CFA, serves in a sales position at Sommerset Brokerage, a registered

investment adviser. Watson frequently drinks excessively. On one occasion, Watson
was cited by local police for misdemeanor public intoxication. According to the
Standard on knowledge of the law and the Standard on misconduct, Watson is in
violation of:
A) both of these Standards.
B) neither of these Standards.
C) only one of these Standards.
Explanation
Watson's excessive drinking is unfortunate, but we have no evidence that it has
affected his work, professional integrity, judgment, or reputation. If he commits an
act involving fraud or dishonesty, he would violate the Standard on misconduct.
(Module 90.1, LOS 90.b, 90.c; Module 91.2, LOS 91.a, 91.b, 91.c; and Module 93.1,
LOS 93.a, 93.b)

Question #5 of 180 Question ID: 1611890

Peter Taylor, a CFA charterholder and a food industry analyst for a large investment
firm, has been invited by Sweet Pineapple Co. to visit the firm's processing plants in
Hawaii. The Standard concerning independence and objectivity recommends that
Taylor:

A) use and pay for commercial transportation, if available.

B) obtain written permission from his employer before he accepts this invitation.
C) decline this invitation if he issues recommendations on the firm’s securities.
Explanation
The recommended procedures for compliance with Standard I(B) Independence and
Objectivity include the recommendation that analysts on company visits pay their
own travel expenses and use commercial transportation if it is available.
(Module 90.1, LOS 90.b, 90.c; Module 91.1, LOS 91.a, 91.b, 91.c; and Module 93.1,
LOS 93.a, 93.b)

Question #6 of 180 Question ID: 1611913

Ruth Brett, a Level I CFA candidate, feels nervous and unprepared the night before the
exam. Brett writes a few key notes on the bottom of her shoe. At the exam, Brett sees
the large number of proctors present and decides not to risk getting caught and does
not look at her shoe. According to the CFA Institute Code of Ethics and Standards of
Professional Conduct, Brett is:

not in violation of any Standard or the Code of Ethics because she did not use the
A)
notes.
 in violation of the Code of Ethics for bringing the notes into the examination room
B)
but is not in violation of any Standard because she did not use the notes.
in violation of both the Code of Ethics and the Standard governing conduct
C) as participants in CFA Institute programs for taking the notes into the
examination room.
Explanation
Brett violated both the Code of Ethics and Standard VII(A) Conduct as Participants in
CFA Institute Programs. By writing down information from the Candidate Body of
Knowledge and taking it into the exam room, she compromised the integrity of the
exam, whether she used the notes or not. Her actions are also in violation of the
Code of Ethics by not acting "with integrity, competence, diligence, respect, and in
an ethical manner."
(Module 90.1, LOS 90.b, 90.c; Module 91.9, LOS 91.a, 91.b, 91.c; and Module 93.1,
LOS 93.a, 93.b)

Question #7 of 180 Question ID: 1611893

Which of the following is least likely included in the CFA Institute Code of Ethics?
Members of CFA Institute must:

A) place their clients’ interests before their employer’s interests.

B) strive to maintain and improve the competence of others in the profession.
C) use reasonable care and exercise independent professional judgment.
Explanation
The requirement that members and candidates place their clients' interests before
their employer's or their own is in Standard III(A) Loyalty, Prudence, and Care. The
other choices are included in the CFA Institute Code of Ethics.
(Module 90.1, LOS 90.b, 90.c; Module 91.4, LOS 91.a, 91.b, 91.c; and Module 93.1,
LOS 93.a, 93.b)

Question #8 of 180 Question ID: 1611905

In formulating her report on GammaCorp's common stock, Barb Kramer, CFA, did a
complex series of statistical tests on the company's past sales and earnings. Based on
this statistical study, Kramer stated in her report that, "GammaCorp's earnings growth
for the next five years will average 15% per year." Her conclusion was based in part on
a regression analysis with a high level of statistical significance. Has Kramer violated
the Standard on communication with clients and prospective clients?

A) Yes, because she didn’t give complete details of the statistical model used.
B) Yes, because she failed to indicate that 15% growth is an estimate.
No, because her projections are within the generally accepted bounds of statistical
C)
accuracy.
Explanation
Kramer violated Standard V(B) Communication with Clients and Prospective Clients.
The problem is with the word "will." Kramer should have used "is estimated to be" to
separate fact from opinion. Statistical estimates of future events are subject to
change and should not be presented as certainties. She need not give complete
details of the statistical model but should indicate its general characteristics and the
important factors involved in her projections.
(Module 90.1, LOS 90.b, 90.c; Module 91.7, LOS 91.a, 91.b, 91.c; and Module 93.1,
LOS 93.a, 93.b)

Question #9 of 180 Question ID: 1611894

Dudley Thompson is a bond salesman for a small broker/dealer in London. His firm is
the lead underwriter on a new junk bond issue for Ibex Corporation, and Thompson
has sent details of the offering to clients. Thompson calls only his accounts over
£1,000,000 for whom he thinks the issue is suitable. Thompson also posts his firm's
optimistic projections for Ibex's performance in several Internet chat rooms.
According to the Standards concerning market manipulation and fair dealing,
Thompson is in violation of:

A) both of these Standards.

B) neither of these Standards.
C) only one of these Standards.
Explanation
Thompson has not violated Standard II(B) Market Manipulation by posting his firm's
projections for Ibex. A firm's recommendation of a security may increase its price
without any intent to mislead the market. The firm has disseminated the details of
the offering to its clients fairly, so Thompson may call individual clients without
violating the Standard III(B) Fair Dealing.
(Module 90.1, LOS 90.b, 90.c; Module 91.3, Module 91.4,LOS 91.a, 91.b, 91.c; and
Module 93.1, LOS 93.a, 93.b)

Question #10 of 180 Question ID: 1611908

Rob Elliott, CFA, is an analyst with a large asset management firm. His personal
portfolio includes a large amount of common stock of Tech Inc., a semiconductor
company, which his firm does not currently follow. The director of the research
department has asked Elliott to analyze Tech and write a report about its investment
potential. Based on the CFA Institute Standards of Professional Conduct, the most
appropriate course of action for Elliot is to:

A) decline to write the report.

B) sell his shares of Tech before completing the report.
disclose the ownership of the stock to his employer and in the report, if he
C)
writes it.
Explanation
According to Standard VI(A) Disclosure of Conflicts, Elliott should disclose his
beneficial ownership of Tech to his employer and to clients and prospects because
such ownership could interfere with his ability to make unbiased and objective
recommendations. Selling his shares and declining to write the report are not
required and are more extreme than simply disclosing the potential conflict.
(Module 90.1, LOS 90.b, 90.c; Module 91.8, LOS 91.a, 91.b, 91.c; and Module 93.1,
LOS 93.a, 93.b)

Question #11 of 180 Question ID: 1611895

Angie Franklin, CFA, who covers technology stocks, joins a conference call for analysts
presented by Cynthia Lucas, chief technology officer for LevelTech. Lucas tells the
analysts that overseas shipments of the company's important new product are going
to be delayed due to manufacturing defects, which is new information to the analysts.
After the meeting Franklin changes her rating on LevelTech from "buy" to "hold" and
sends a note to accounts recommending the sale of LevelTech. Franklin:
A) did not violate the Standards.
violated the Standard on nonpublic information by revising her rating on
B)
LevelTech.
violated the Standard on fair dealing by rating the stock a “hold” but recommending
C)
sale of the shares to her accounts.
Explanation
Telling a selected group of analysts new information does not constitute public
disclosure, and therefore acting or causing others to act on this information is a
violation of Standard II(A) Material Nonpublic Information. Recommending the sale
of a stock rated as a "hold" is not a violation of Standard III(B) Fair Dealing.
(Module 90.1, LOS 90.b, 90.c; Module 91.3, Module 91.4,LOS 91.a, 91.b, 91.c; and
Module 93.1, LOS 93.a, 93.b)

Question #12 of 180 Question ID: 1611901

According to the recommended procedures for complying with the Standard on

suitability, which of the following statements regarding an investment policy
statement (IPS) is least accurate?

An IPS should describe the roles and responsibilities of both the adviser and the
A)
client.
A member or candidate is not responsible for financial information withheld by the
B)
client.
A client’s IPS must be updated at least quarterly to reflect any changes in
C)
their investment profile.
Explanation
Standard III(C) Suitability requires that members and candidates update client
information (the IPS) at least annually. The IPS can be updated more frequently if
there are significant changes in the investment strategy or client characteristics.
(Module 90.1, LOS 90.b, 90.c; Module 91.5, LOS 91.a, 91.b, 91.c; and Module 93.1,
LOS 93.a, 93.b)

Question #13 of 180 Question ID: 1611902

Sue Johnson, CFA, has an elderly client with a very large asset base. The client intends
to start divesting her fortune to various charities. Johnson is on the Board of a local
charitable foundation. Johnson most appropriately:
 must not discuss anything regarding her client and her client’s intentions
A)
with the charitable foundation without permission.
can discuss her client’s situation with the charitable foundation as long as she
B)
informs other local charities of her client’s intentions.
can make this known to the charitable foundation so that they can solicit the client,
C)
since it is the client’s wish to divest assets to charities in the future.
Explanation
To comply with Standard III(E) Preservation of Confidentiality, Johnson must not
discuss with her charitable foundation anything regarding her client and her client's
intentions. It does not matter that her client intends to give money to charities in the
near future.
(Module 90.1, LOS 90.b, 90.c; Module 91.5, LOS 91.a, 91.b, 91.c; and Module 93.1,
LOS 93.a, 93.b)

Question #14 of 180 Question ID: 1611896

According to the Standard related to loyalty, prudence, and care, which of the
following statements regarding the voting of proxies on client holdings is least
accurate?

A) Proxies have economic value to a client.

An investment management firm should vote all proxies on client holdings
B)
unless the client reserves that right.
Members and candidates should explicitly disclose the firm’s proxy voting policies to
C)
clients.
Explanation
Standard III(A) Loyalty, Prudence, and Care does not require the voting of all proxies.
A cost-benefit analysis may support the conclusion that the voting of all proxies is
not beneficial to the client in light of the time and effort required. Voting on
nonroutine issues that have a material impact is required.
(Module 90.1, LOS 90.b, 90.c; Module 91.4, LOS 91.a, 91.b, 91.c; and Module 93.1,
LOS 93.a, 93.b)

Question #15 of 180 Question ID: 1611909

Alvin Gold, CFA, resides in Country T and does business as an investment advisor
primarily in Country U. Country T allows trading on non-public information and does
not require disclosure of referral fees. Country U prohibits trading on non-public
information only if it is gained by illegal means and requires disclosure of referral fees
of over $100 (U.S. equivalent). Gold accepts a referral fee of $75, and in the course of
a meeting with two other analysts and the firm's CFO, Gold receives material non-
public information. To comply with the Code and Standards, Gold:

A) need not disclose the referral fee but cannot trade on the non-public information.
must disclose the referral fee and cannot trade on the non-public
B)
information.
C) must disclose the referral fee but may trade on the non-public information.
Explanation
According to Standard I(A) Knowledge of the Law, Gold must comply with the most
strict of the laws of Country T, laws of Country U, and the CFA Standards of Practice.
In this case, the most strict rules are those in the Standards of Practice. Standard
VI(C) Referral Fees requires the disclosure of all referral fees and Standard II(A)
Material Nonpublic Information prohibits acting or causing others to act on the basis
of material non-public information.
(Module 90.1, LOS 90.b, 90.c; Module 91.1, Module 91.3, Module 91.8, LOS 91.a, 91.b,
91.c; and Module 93.1 LOS 93.a, 93.b)

Question #16 of 180 Question ID: 1611914

Which of the following statements made in a marketing brochure is a violation of the

Standards?

“Roger Langley, Chartered Financial Analyst, has been a portfolio manager for ten
A)
years and passed all three levels of the CFA examinations on his first attempts.”
“Jennifer York has passed the Level II exam and will earn the right to use
B)
the CFA designation after completing the Level III exam this June.”
“Paul Yeng, CFA, has retired from the firm after 25 years of service. Much of the
C) firm’s past success can be attributed to Yeng’s efforts as an analyst and portfolio
manager.”
Explanation
According to Standard VII(B) Reference to the CFA Institute, the CFA Designation, and
CFA Program, citing an expected date for completing a level of the CFA Program is a
misuse of the CFA designation. (Module 90.1, LOS 90.b, 90.c; Module 91.9, LOS 91.a,
91.b, 91.c; and Module 93.1, LOS 93.a, 93.b)
Question #17 of 180 Question ID: 1611915

Hedge Funds Unlimited, a global hedge fund, has publicly acknowledged in writing
that it has adopted the CFA Institute Code and Standards as its policies. Which of the
following is least likely a violation of the firm's policies?

An analyst at the firm working overseas uses material nonpublic information as

A)
allowed by local law to make investment decisions for discretionary client accounts.
A junior analyst at the firm uses a subscription to his local newspaper and the
B) opinions of his friends and colleagues to make investment recommendations for
discretionary client accounts.
A CFA candidate at the firm, who is registered for the Level III exam,
C) includes reference to participation in the CFA program and her status as a
Level III candidate in her biographical background.
Explanation
All investment personnel in this example are subject to the CFA Institute Code and
Standards as part of the firm's established policies. The candidate's reference to her
Level III status and the inclusion of such information in her biographical information
is not in violation of the CFA Institute Code and Standards. Candidates may clearly
reference their participation in the CFA program, provided such reference does not
imply the achievement of any type of partial designation. The analyst is considered a
candidate since she is registered to take the next scheduled examination. The Code
and Standards prohibit using material nonpublic information. Since the Code and
Standards are stricter than the local law, they must be followed by the analyst. The
junior analyst failed to exercise diligence and thoroughness in making investment
recommendations and failed to have a reasonable and adequate basis for such
recommendations.
(Module 90.1, LOS 90.b, 90.c; Module 91.1, Module 91.3, Module 91.7, Module 91.9,
LOS 91.a, 91.b, 91.c; and Module 93.1, LOS 93.a, 93.b)

Question #18 of 180 Question ID: 1611910

According to the Code and Standards, members and candidates who are involved in
distributing an initial public offering (IPO) of equity shares and wish to participate in
the IPO:

A) may participate unless the IPO is oversubscribed.

B) may not participate because this creates a conflict of interest.
C) must obtain pre-clearance from a supervisor before participating.
Explanation
Standard VI(B) Priority of Transactions recommends, but does not require, that a
member or candidate obtain pre-clearance from his or her supervisor before
participating in an equity IPO. Guidance for Standard III(B) Fair Dealing states that
members and candidates distributing IPO shares must distribute shares in an
oversubscribed IPO to clients and may not withhold shares for themselves.
(Module 90.1, LOS 90.b, 90.c; Module 91.4, Module 91.8, LOS 91.a,91.b,91.c; and
Module 93.1, LOS 93.a, 93.b)

Question #19 of 180 Question ID: 1611903

Linda Bryant, CFA, is an employee of Roomkin Investment House, which underwrites

equity and debt offerings. She has been approached by SimthCo to consult on a
private debt placement. According to CFA Institute Standards of Professional Conduct,
before Bryant agrees to accept this job, she is required to:

obtain written consent from Roomkin after submitting details of the

A)
arrangement.
B) talk to her immediate supervisor and get her approval to take this consulting job.
inform SimthCo in writing that she will accept the job and provide details of the
C)
arrangement to Roomkin in writing.
Explanation
To comply with Standard IV(B) Additional Compensation Arrangements, Bryant must
obtain written consent from her employer before undertaking the independent
consulting project. Bryant must also provide a description of the types of services
being provided, the length of time the arrangement will last, and the compensation
she expects to receive for her services.
(Module 90.1, LOS 90.b, 90.c; Module 91.6, LOS 91.a,91.b,91.c; and Module 93.1, LOS
93.a, 93.b)

Question #20 of 180 Question ID: 1611906

To comply with the Code and Standards, analysts who send research
recommendations to clients must:

keep records of all the data and analysis that went into creating the
A)
report.
B) send recommendations only to those clients for whom the investments are suitable.
 not send recommendations without including the underlying analysis and basic
C)
investment characteristics.
Explanation
Standard V(C) Record Retention requires members to maintain records of the data
and analysis they use to develop their research recommendations.
Recommendations may be brief, in capsule form, or simply a list of buy/sell
recommendations. A list of recommendations may be sent without regard to
suitability, including both safe income stocks and aggressive growth stocks, for
example.
(Module 90.1, LOS 90.b, 90.c; Module 91.7, LOS 91.a, 91.b, 91.c; and Module 93.1,
LOS 93.a, 93.b)

Question #21 of 180 Question ID: 1611904

Amy Brooks, a Level III CFA candidate, has been given supervisory responsibilities. In
carrying out her responsibilities, Brooks has discovered that the firm's compliance
system is inadequate. She informed her supervisor, who is not supportive of Brooks's
efforts to correct the situation. According to CFA Institute Standards of Professional
Conduct, Brooks:

has satisfied her obligation under the Code and Standards by informing her
A)
manager of the situation.
must dissociate herself from the firm if the firm is not in compliance with the CFA
B)
Institute Standards.
should decline in writing to accept supervisory responsibilities until an
C)
adequate compliance system is adopted.
Explanation
Standard IV(C) Responsibilities of Supervisors indicates that a member should
decline supervisory responsibility in writing until the firm adopts reasonable
compliance procedures. Otherwise, Brooks cannot adequately exercise her
responsibility.
(Module 90.1, LOS 90.b, 90.c; Module 91.6, LOS 91.a,91.b,91.c; and Module 93.1, LOS
93.a, 93.b)

Question #22 of 180 Question ID: 1611916

Excluding the results of terminated accounts when calculating historical performance

is recommended by:
A) both GIPS and the Standard concerning performance presentation.
B) GIPS, but not by the Standard concerning performance presentation.
C) neither GIPS nor the Standard concerning performance presentation.
Explanation
Standard III(D) Performance Presentation recommends that terminated accounts be
included in historical performance calculations.
(Module 90.1, LOS 90.b, 90.c; Module 91.5, LOS 91.a, 91.b, 91.c , Module 92.1, LOS
92.c; and Module 93.1, LOS 93.a, 93.b)

Question #23 of 180 Question ID: 1611907

Ken Toma, CFA, has just completed an extensive analysis and concluded that the
demand for vacation rentals in Hawaii will far exceed the supply for the foreseeable
future. Toma writes a research report stating, "Based on the fact that the demand for
Hawaiian beach vacations will exceed the supply of rooms for the foreseeable future, I
recommend the purchase of shares of The Hawaiian REIT, a diversified portfolio of
Hawaiian beachfront resorts." If Toma presents this report to his clients, he will most
likely violate the CFA Institute Standards by:

A) not distinguishing between fact and opinion.

B) not considering the suitability of the investment for his clients.
C) failing to have a reasonable and adequate basis for his recommendation.
Explanation
Standard V(B) Communication with Clients and Prospective Clients requires that
Toma separate opinion from fact. Toma's statement that excess demand will persist
into the foreseeable future is an opinion, not a fact. Toma has established a
reasonable basis for his recommendation through his analysis. Suitability does not
become an issue until a client chooses to act on Toma's recommendation.
(Module 90.1, LOS 90.b, 90.c; Module 91.7, LOS 91.a, 91.b, 91.c; and Module 93.1,
LOS 93.a, 93.b)

Question #24 of 180 Question ID: 1611897

Derek Stevens, CFA, manages the pension plan assets of Colors, Inc. When voting
proxies for plan equities, Stevens owes a fiduciary duty to:

A) the plan trustees who hired him.

B) the plan participants and beneficiaries.
C) the managers, stockholders, and bondholders of Colors, Inc., equally.
Explanation
Under Standard III(A) Loyalty, Prudence, and Care, the fiduciary duty in this case is to
plan participants and beneficiaries, not shareholders or plan trustees.
(Module 90.1, LOS 90.b, 90.c; Module 91.4, LOS 91.a, 91.b, 91.c; and Module 93.1,
LOS 93.a, 93.b)

Question #25 of 180 Question ID: 1611898

An analyst at Romer changes her rating on TelSky from "buy" to "hold" and sends an
email explaining the change to all clients and firm brokers. Subsequently, Paul
Stevens, CFA, a broker at Romer, receives a call from a client who wants to buy 15,000
shares of TelSky. Stevens must:

advise his client of the change in recommendation before accepting the

A)
order.
not accept the order until the customer has had time to receive and read the new
B)
report.
accept the order without mentioning the ratings change because the order is
C)
unsolicited.
Explanation
According to Standard III(B) Fair Dealing, if a client places an order that goes against
the firm's recommendation for that security, members and candidates should
inform the client of the discrepancy between the order and the firm's
recommendation before accepting the order.
(Module 90.1, LOS 90.b, 90.c; Module 91.4, LOS 91.a, 91.b, 91.c; and Module 93.1,
LOS 93.a, 93.b)

Question #26 of 180 Question ID: 1611888

Which of the following is one of the eight major sections of the GIPS standards for
firms?

A) Independent Third-Party Verification.

B) Input Data and Calculation Methodology.
C) Guidelines for Attributing Performance to Sub-Advisers.
Explanation
Input Data and Calculation Methodology is one of the eight major sections of the
GIPS standards for firms; the others are not.
(Module 92.1, LOS 92.b)

Question #27 of 180 Question ID: 1611899

Edie Pschorr, CFA, notices that a bond is priced at 98.0 in one market and 98.4 in
another market. Pschorr places an order to buy a large number of these bonds in the
first market and simultaneously places an order to sell the same number of bonds in
the second market. The bond's price increases to 98.2 in the first market and
decreases to 98.2 in the second market. Are Pschorr's trades a violation of the Code
and Standards?

A) No.
B) Yes, because they violate the Standard concerning fair dealing.
C) Yes, because they violate the Standard concerning market manipulation.
Explanation
The trader has carried out an arbitrage transaction. Because she did not exhibit any
intent to distort prices or trading volume, the member did not violate Standard II(B)
Market Manipulation. Standard III(B) Fair Dealing is concerned with fair treatment of
clients and is not relevant to this transaction.
(Module 90.1, LOS 90.b, 90.c; Module 91.3, Module 91.4, LOS 91.a, 91.b, 91.c; and
Module 93.1, LOS 93.a, 93.b)

Question #28 of 180 Question ID: 1611911

Greg Hoffman, CFA, has been offered a cash payment by Hill Manufacturing, Inc. to
write a research report on their company. According to the Code and Standards,
Hoffman:

must disclose the nature of the compensation from Hill in his research
A)
report.
B) may not accept compensation from Hill to produce research on the company.
may produce the research report but may not make a recommendation on Hill's
C)
securities.
Explanation
Standard I(B) Independence and Objectivity requires disclosure of the nature of any
compensation from the subject company. Standard VI(A) Disclosure of Conflicts
more generally requires disclosure of any potential conflict of interest in research
reports and investment recommendations.
(Module 90.1, LOS 90.b, 90.c; Module 91.1, Module 91.8, LOS 91.a, 91.b, 91.c; and
Module 93.1, LOS 93.a, 93.b)

Question #29 of 180 Question ID: 1611912

Shan Ang, CFA, is a portfolio manager at Huang Investments. Lian Jan, an old friend of
Ang's, is an executive recruiter in the same city. Jan proposes that she will refer any
high-level executives that she places locally to Ang, in exchange for one round of golf
at Ang's country club for each new client. According to the Standard concerning
referral fees, Ang would be required to disclose this referral arrangement:

A) only to all prospective clients referred by Jan.

B) to his employer and all prospective clients referred by Jan.
C) to all prospective clients, current clients, and his employer.
Explanation
Standard VI(C) Referral Fees states that members and candidates must disclose to
employers and to affected prospects and clients, before entering into any formal
agreement for services, any benefits received for the recommendation of services
provided by the member.
(Module 90.1, LOS 90.b, 90.c; Module 91.8, LOS 91.a, 91.b, 91.c; and Module 93.1,
LOS 93.a, 93.b)

Question #30 of 180 Question ID: 1611892

Yvette Michaels, CFA, an analyst for Torborg Investments, inadvertently overhears a

conversation between two executives of Collective Healthcare in which they mention
an upcoming tender offer for Network, a stock she covers. Michaels has followed both
companies extensively and feels their consolidation would be very beneficial for both
companies. She tells her supervisor, a senior analyst, about the proposed tender
offer. Michaels' actions are:

A) in violation of the Standards.

B) not in violation of the Standards because she told only her supervisor.
 not in violation of the Standards because she has not traded shares of Network or
C)
changed her report on the company.
Explanation
Michaels has violated Standard II(A) Material Nonpublic Information. Members who
possess material nonpublic information are prohibited from acting or causing others
to act on that information. She may not share the information with anyone except
designated supervisory or compliance employees within her firm. Disclosing to her
supervisor, who is not identified as a designated supervisor of compliance issues, is
not permitted.
(Module 90.1, LOS 90.b, 90.c; Module 91.3, LOS 91.a, 91.b, 91.c; and Module 93.1,
LOS 93.a, 93.b)

Question #31 of 180 Question ID: 1611790

Kimberwick Technologies reported the following information for the year ending
December 31.

Data

Net sales 50,000

Cash expenses 3,250

Cash inputs 17,000

Cash taxes 7,000

Increase in receivables 500

Depreciation expense 1,000

Cash flow from investing -5,000

Cash flow from financing -4,250

If the cash balance increased $13,000 over the year, cash flow from operations (CFO)
is closest to:

A) $21,250.
B) $21,750.
C) $22,250.
Explanation
The easiest way to calculate CFO here is total cash flow – cash flow from investing –
cash flow from financing = $13,000 + 5,000 + 4,250 = $22,250. Alternatively, CFO =
$50,000 − 3,250 − 17,000 − 7,000 − 500 = $22,250.
(Module 32.2, LOS 32.b)

Question #32 of 180 Question ID: 1611774

A principal-agent conflict is most likely to occur between:

A) managers and employees.

B) shareholders and senior managers.
C) suppliers and the board of directors.
Explanation
The principals in a corporation are the shareholders who own the firm. The
principal-agent conflict occurs because the interests of shareholders often conflict
with the incentives of board members or senior managers. The other answer choices
do not involve the principals (owners) of the company.
(Module 24.1, LOS 24.a)

Question #33 of 180 Question ID: 1611752

A financial firm employs machine learning to model its risk exposures. The machine
identifies a number of risk relationships in the input data, but the firm's management
believes some of these relationships are spurious. If so, it is most likely that the
model:

A) exhibits overfitting.
B) treats true parameters as noise.
C) is not complex enough to describe the data.
Explanation
Spurious relationships and patterns are likely to result from overfitting, which
describes a model that is too complex and treats noise as true parameters.
(Module 11.1, LOS 11.b)
Question #34 of 180 Question ID: 1611785

Which of the following statements about a United States public corporation's annual
reports, SEC filings, and press releases is most accurate?

A) Annual and quarterly SEC filings must be audited.

Interim SEC filings typically update the major financial statements and
B)
footnotes.
Annual reports to shareholders are typically the most factual and objective source of
C)
information about a company.
Explanation
Besides the annual SEC filings, an analyst should examine a company's quarterly or
semiannual filings. These interim filings typically update the major financial
statements and footnotes, but are not necessarily audited. Annual reports to
shareholders and press releases are written by management and are often viewed
as public relations or sales materials.
(Module 29.1, LOS 29.e)

Question #35 of 180 Question ID: 1611799

Which of the following is most likely a motivation for a company's management to

issue low-quality financial reports?

A) Management has provided optimistic earnings guidance.

B) Oversight provided by the board of directors is weak or inadequate.
C) Accounting principles permit a wide range of acceptable treatments and estimates.
Explanation
Meeting or exceeding its own earnings guidance is a possible motivation for
management to issue low-quality financial reports. Inadequate board oversight and
wide ranges of acceptable accounting treatments are more appropriately viewed as
opportunities for issuing low-quality financial reports.
(Module 38.1, LOS 38.d)

Question #36 of 180 Question ID: 1611741

The initial market value of a portfolio was $100,000. One year later the portfolio was
valued at $90,000 and two years later at $99,000. The geometric mean annual return
excluding any dividend income is closest to:
A) −0.5%.
B) −0.4%.
C) 0.0%.
Explanation
R1 = −10/100 = −10%; R2 = +9/90 = +10%

geometric mean = √(0.9) (1.1) − 1 = −0.005 or − 0.5%

An alternative way to get the geometric mean is:

1

ending value n

( ) − 1 = geometric mean return

beginning value

99
√ − 1 = −0.005 or −0.5%
100

(Module 3.1, LOS 3.a) and (Module 3.1, LOS 3.b)

Question #37 of 180 Question ID: 1611764

Consider the following foreign exchange and interest rate information:

Spot rate: 1.3382 USD/EUR.

One year riskless USD rate = 2.5%.
One year riskless EUR rate = 3.5%.

The one-year arbitrage-free forward exchange rate is closest to:

A) 1.2391 USD/EUR.
B) 1.3253 USD/EUR.
C) 1.3513 USD/EUR.
Explanation
Arbitrage-free forward rate = 1.3382 USD/EUR × (1.025 / 1.035) = 1.3253 USD/EUR.
(Module 2.2, LOS 2.c, Module 19.1, LOS 19.b)

Question #38 of 180 Question ID: 1611775

A company is most likely to be viewed as having poor liquidity, compared to its

industry, if it has a:
A) low current ratio.
B) low days of payables.
C) high debt-to-equity ratio.
Explanation
The current ratio, CA/CL, is a primary measure of liquidity. The debt-to-equity ratio is
primarily a measure of a company's solvency and financial risk, not liquidity. Low
days of payables indicate the company pays it suppliers sooner than other firms, not
necessarily that is has poor liquidity.
(Module 25.1, LOS 25.b)

Question #39 of 180 Question ID: 1611793

Haltata Turf & Sod currently uses the first in, first out (FIFO) method to account for
inventory. Due to significant tax-loss carryforwards, the company has an effective tax
rate of zero. Prices are rising and inventory quantities are stable. If the company were
to use last in, first out (LIFO) instead of FIFO:

A) net income would be lower and cash flow would be higher.

B) cash flow would remain the same and working capital would be lower.
C) gross margin would be higher and stockholder’s equity would be lower.
Explanation
In the absence of taxes, there is no difference in cash flow between LIFO and FIFO.
In addition, using LIFO would result in lower working capital (inventory is lower).
Using LIFO would result in lower net income because of a lower gross margin (cost
of goods sold is higher).
(Module 34.2, LOS 34.b)

Question #40 of 180 Question ID: 1611753

An analyst is forecasting market shares for the top three firms (which make up 90% of
the market share) in a given market

Scenario Firm Market Share Firm Market Share Firm Market Share

1 Smith 40% Jones 30% Adams 20%

2 Smith 35% Jones 40% Adams 15%

3 Smith 30% Jones 30% Adams 30%

Which scenario produces the highest Herfindahl-Hirschman Index?

A) Scenario 1.
B) Scenario 2.
C) Scenario 3.
Explanation
Scenario 2.
Scenario 1: 0.402 + 0.302 + 0.202 = 0.290.
Scenario 2: 0.352 + 0.402 + 0.152 = 0.305.
Scenario 3: 0.302 + 0.302 + 0.302 = 0.270.
(Module 12.3, LOS 12.e)

Question #41 of 180 Question ID: 1611787

The five steps required for a company to record revenue are least likely to include:

A) identifying a customer contract.

B) receiving proportional payments.
C) identifying separate performance obligations in the contract.
Explanation
Receipt of payments is not one of the required steps described by accounting
standards to recognize revenue.
(Module 30.1, LOS 30.a)
Question #42 of 180 Question ID: 1611777

Nate Kason is a CFO evaluating whether to take on a project which requires a

$100,000 initial investment. Kason's required return for the project is 5.75%, which is
equivalent to the company's weighted average cost of capital. After estimating the
present value of all outflows and inflows, Kason determines the net present value of
the project to be zero. Incorporating the $100,000 initial investment, the internal rate
of return for the project is best described as:

A) below 5.75%.
B) above 5.75%.
C) equal to 5.75%.
Explanation
When a project has a net present value (NPV) of zero, this necessarily implies that
the project's internal rate of return (IRR) is equal to the required rate of return.
Here, the required rate of return is the weighted average cost of capital of 5.75%.
The internal rate of return will incorporate the present value of all inflows and
outflows (including the initial investment), and because the NPV is zero, the IRR must
also be equal to 5.75%.
(Module 26.1, LOS 26.b)

Question #43 of 180 Question ID: 1611750

A simple linear regression model produces the following outputs:

Total sum of squares 9,575.81

Mean regression sum of squares 7,115.74

Mean squared error 1,663.46

The F-statistic for this regression is closest to:

A) 1.3.
B) 4.3.
C) 5.8.
Explanation
The F-statistic is the ratio of the mean regression sum of squares (MSR) to the mean
squared error (MSE). 7,115.74 / 1,663.46 = 4.278.
(Module 10.2, LOS 10.c)

Question #44 of 180 Question ID: 1611760

In the context of the tools of geopolitics, voluntary export restraints are best
categorized as:

A) restrictive.
B) cooperative.
C) noncooperative.
Explanation
Economic tools of geopolitics are categorized as either cooperative or
noncooperative. Voluntary export restraints are an example of a noncooperative
economic tool.
(Module 16.1, LOS 16.e)

Question #45 of 180 Question ID: 1587906

A company's investments in marketable securities include a 3-year tax-exempt bond

measured at amortized cost and a 5-year government note measured at fair value
through other comprehensive income. On its income statement, the company should
report the coupon interest received from:

A) both of these securities.

B) neither of these securities.
C) only one of these securities.
Explanation
Interest and dividends received are reported as income, regardless of the balance
sheet classification of marketable securities.
(Module 31.1, LOS 31.c)

Question #46 of 180 Question ID: 1611759

A central bank's ability to achieve its policy goals is most likely to be limited by
available resources when which of the following actual rates is below its target rate?

A) Interest rate.
B) Inflation rate.
C) Exchange rate.
Explanation
With exchange rate targeting, a central bank's ability to increase the value of the
domestic currency is limited by the amount of foreign reserves the country has
available to buy its own currency in the foreign exchange market. While inflation
targeting and interest rate targeting have limitations (e.g., liquidity trap conditions
may exist, interest rates are bounded by zero), the central bank's resources are not
typically a limitation.
(Module 15.2, LOS 15.c)

Question #47 of 180 Question ID: 1611803

Other things equal, for a profitable company, issuing debt to repurchase outstanding
stock will most likely:

A) decrease net income and ROE.

B) increase net income but not necessarily ROE.
C) decrease net income with an indeterminate effect on ROE.
Explanation
Increasing financial leverage will increase interest expense and reduce net income.
The share repurchase will decrease equity as well, so the effect on ROE is
indeterminate.
(Module 39.2, LOS 39.b)

Question #48 of 180 Question ID: 1611783

Under Modigliani and Miller's assumptions and with no taxes, the value of a firm is:

A) unaffected by its capital structure.

B) maximized with an all-debt capital structure.
C) maximized with an all-equity capital structure.
Explanation
Under Modigliani and Miller's assumptions, in the absence of taxes a firm's capital
structure does not affect its value. If taxes exist while the rest of their assumptions
hold, Modigliani and Miller conclude a firm would finance itself entirely with debt to
maximize its value.
(Module 27.2, LOS 27.c)

Question #49 of 180 Question ID: 1611782

Conditions that most likely support a high weight of debt in a company's capital
structure include:

A) operating in a cyclical industry.

B) using a subscription-based revenue model.
C) having a high degree of operating leverage.
Explanation
Because of the interest and principal obligations associated with debt financing, a
company must be relatively stable to support the payments as they come due.
Subscription-based revenue models, where customers pay monthly or annual
recurring fees, are typically more predictable and stable than pay-per-use revenue
models. Operating in a cyclical industry or with a high degree of operating leverage
is more consistent with having a relatively low weight of debt in the capital structure.
(Module 27.1, LOS 27.b)

Question #50 of 180 Question ID: 1611794

From the point of view of a financial analyst, when evaluating companies that use
different inventory cost assumptions, in a period of:

A) stable prices, LIFO inventory is preferred to FIFO inventory.

B) decreasing prices, FIFO inventory is preferred to LIFO inventory.
C) increasing prices, FIFO cost of sales is preferred to LIFO cost of sales.
Explanation
The most useful estimates of inventory and cost of sales are those that best
approximate current cost. Whether prices are increasing or decreasing, FIFO
provides a better estimate of inventory values, and LIFO provides a better estimate
of cost of sales. If prices are stable, there is no difference between LIFO and FIFO
estimates of inventory or cost of sales.
(Module 34.2, LOS 34.b)
Question #51 of 180 Question ID: 1611743

An analyst estimates a stock has a 40% probability of earning a 10% return, a 40%
probability of earning a 12.5% return, and a 20% probability of earning a 30% return.
The stock's standard deviation of returns based on this returns model is closest to:

A) 3.74%.
B) 5.75%.
C) 7.58%.
Explanation
Expected value = (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%

(Module 5.1, LOS 5.a)

Question #52 of 180 Question ID: 1611744

Shortfall risk is best described as the probability:

A) of a credit rating downgrade due to possible earnings shortfalls.

B) of failing to make a contractually promised payment.
C) that portfolio value will fall below some minimum level at a future date.
Explanation
Shortfall risk refers to the probability that a return is less than a chosen minimum
threshold level. is the other choices refer to downgrade risk and default risk.
(Module 5.1, LOS 5.c)

Question #53 of 180 Question ID: 1611800

Which of the following is least likely a limitation of mechanisms used to discipline

financial reporting quality?

A) An unqualified audit opinion offers reasonable assurance rather than a guarantee.

 Securities regulators may require public disclosure of the results of
B)
disciplinary proceedings.
Loan covenants may give the borrowing company an incentive to manipulate
C)
reported results.
Explanation
All three statements are accurate, but public disclosure of the results of disciplinary
proceedings is seen as a deterrent to poor financial reporting quality rather than a
limitation. It can be seen as a limitation that audit opinions only offer reasonable
assurance rather than guarantees with regards to the financial statements. Private
contracts often contain clauses such as loan covenants to protect the lender from
default. However, this could create an incentive for the borrowing firm to produce
low quality financial reports that technically do not breach covenants, and so can be
seen as a limitation.
(Module 38.1, LOS 38.e)

Question #54 of 180 Question ID: 1611791

Given the following common-size cash flow statement:

Cash Flow Statement Extract (Percentage of Revenues)

20X3 20X2

Net income 13.4% 13.4%

Accounts receivable –0.4% –0.5%

Operating cash flow 12.2% 12.8%

Cash from sale of fixed assets 0.7% 0.75%

Purchase of plant and equipment –12.3% –12.0%

Investing cash flow –11.6% –11.3%

Cash dividends –2.1% –2.5%

Total cash flow 1.1% 1.9%

An analyst should most likely conclude that:

A) accounts receivable increased during the year.

B) a smaller dividend was paid in 20X3 than 20X2.
C) financing cash flow for 20X3 was –2.1% of revenue.
Explanation
On a common-size cash flow statement, the positive or negative adjustments for
working capital tell us whether a balance sheet item decreased or increased during
the year. Because accounts receivable is being subtracted, its change in value must
have been a use of cash, which means the balance sheet asset increased during the
year.
We cannot tell from this extract the size of the dividend paid, only that the dividend
in 20X3 was a smaller percentage of the revenue when compared to 20X2. We are
given operating, investing, and total cash flow, so financing cash flow is 1.1% – 12.2%
– (–11.6%) = 0.5%.
(Module 33.1, LOS 33.a)

Question #55 of 180 Question ID: 1611772

If a company wishes to become public in a way that will generate new capital to fund
several large projects, which of the following mechanisms will be most effective in
providing the capital?

A) Direct listing.
B) Initial public offering.
C) Special purpose acquisition company.
Explanation
An IPO involves a company becoming public by issuing shares to the marketplace.
An IPO will produce a cash infusion for the company. Direct listings do not raise new
capital. An SPAC raises capital to acquire a private company.
(Module 22.1, LOS 22.c)

Question #56 of 180 Question ID: 1611802

The presentation format of balance sheet data that standardizes the first-year values
to 1.0 and presents subsequent years' amounts relative to 1.0 is:

A) an indexed balance sheet.

B) a vertical common-size balance sheet.
C) a horizontal common-size balance sheet.
Explanation
On a horizontal common-size balance sheet, the divisor is the first-year values so
they are all standardized to 1.0 by construction. Trends in the values of these items
as well as the relative growth in these items are readily apparent. A vertical
common-size balance sheet expresses all balance sheet accounts as a percentage of
total assets and does not standardize the initial year.
(Module 39.1, LOS 39.a)

Question #57 of 180 Question ID: 1611797

For 20X1, Belcher Motors reported a decrease in its deferred tax liabilities, a decrease
in its deferred tax assets, and an increase in its valuation allowance. To an analyst, this
would most likely suggest that the company has:

A) decreased its estimate of future profitability.

B) increased the estimated useful life of some capitalized assets.
increased its estimate of the period over which unearned revenue will be
C)
recognized.
Explanation
The increase in the valuation allowance tells us that the company has decreased its
estimate of its future profitability and thus its ability to realize the benefits of its
deferred tax assets. A longer period for recognition of unearned revenue would not
affect the temporary differences reflected in deferred tax assets. Increasing the
estimate of assets' useful lives would tend to slow financial statement depreciation
relative to depreciation for tax, which would increase deferred tax liability going
forward, other things constant. Decreases in the carrying values of both a DTL and a
DTA may reflect a decrease in the tax rate.
(Module 37.2, LOS 37.b)

Question #58 of 180 Question ID: 1611747

Which of the following statements about hypothesis testing is most accurate?

A) Rejecting a true null hypothesis is a Type I error.

The power of a test is the probability of failing to reject the null hypothesis when it is
B)
false.
For a one-tailed test regarding the value of parameter X, the null hypothesis would
C)
be H0: X = 0, and the alternative hypothesis would be HA: X ≠ 0.
Explanation
Type I error is rejecting the null hypothesis when it is true. The power of a test is the
probability of rejecting the null hypothesis when it is false. HA: X ≠ 0 indicates a two-
tailed test, while HA: X < 0 or HA: X > 0 indicates a one-tailed test.

(Module 8.1, LOS 8.a)

Question #59 of 180 Question ID: 1611784

Agency costs of equity:

A) are unaffected by capital structure.

B) increase with greater debt in the capital structure.
C) decrease with greater debt in the capital structure.
Explanation
Agency costs of equity result from differences between equity owners and
management. These costs are reduced when a greater proportion of debt is used in
the capital structure because fixed interest charges reduce the amount of income
over which managers have discretion in deploying.
(Module 27.2, LOS 27.d)

Question #60 of 180 Question ID: 1611745

The bootstrap method of estimating the standard error of sample means involves
drawing repeated samples from a data set, each with:

A) outliers removed.
B) the same sample size.
C) one observation removed.
Explanation
The bootstrap method involves drawing repeated samples of size n from the same
data set and calculating the standard deviation of the resulting sample means. The
jackknife method involves calculating multiple means from the same sample, each
with one observation removed, and calculating the standard deviation of those
means.
(Module 7.1, LOS 7.c)
Question #61 of 180 Question ID: 1611761

An analyst writes the following about two nations:

East Dumerde has a state-dominated domestic economy and conducts little

foreign trade.
West Dumerde uses its large economy and geophysical resource endowment to
discourage other nations from criticizing its human rights record.

In this analyst's opinion, the geopolitics of both East Dumerde and West Dumerde are
most accurately described as:

A) hegemony.
B) nationalism.
C) non-cooperation.
Explanation
In this analyst's opinion, East Dumerde is best described as practicing autarky
(nationalism and non-cooperation) and West Dumerde is best described as
practicing hegemony (globalization and non-cooperation).
(Module 16.1, LOS 16.b)

Question #62 of 180 Question ID: 1611789

An analyst gathered the following data about a company:

Collections from customers are $5,000.

Depreciation is $800.
Cash expenses (including taxes) are $2,000.
Tax rate = 30%.
Net cash increased by $1,000.

If inventory increases over the period by $800, cash flow from operations equals:

A) $1,600.
B) $2,400.
C) $3,000.
Explanation
Use the direct method.

Collections from customers $5,000

Cash expenses –$2,000
Cash flow from operations $3,000

Cash expenses are given. If you had been given COGS, you would need to adjust that
for inventory changes to get cash expenses for inputs. Depreciation is a non-cash
change.
Changes in depreciation are used with the indirect method. Net change in cash will
reflect CFI and CFF, not just CFO.
(Module 32.1, LOS 32.b)

Question #63 of 180 Question ID: 1611792

Greene Company discloses that its net income for the most recent period was
reduced by a writedown of inventory to net realizable value. What effect is the
inventory writedown most likely to have on Greene's net income in future periods?

A) Increase.
B) Decrease.
C) No effect.
Explanation
In future periods, lower-valued inventory will result in lower cost of sales and higher
net income.
(Module 34.1, LOS 34.a)

Question #64 of 180 Question ID: 1611756

Automatic stabilizers are government programs that require no legislation and tend
to:

A) automatically increase spending at the same growth rate as real GDP.

B) reduce interest rates, thus stimulating aggregate demand.
change the government budget deficit in an opposite direction to economic
C)
growth.
Explanation
Automatic stabilizers are built-in features that tend to automatically promote a
budget deficit during a recession and a budget surplus during an inflationary boom,
without a change in policy.
(Module 14.1, LOS 14.b)

Question #65 of 180 Question ID: 1611780

Jay Company is considering a new joint venture with Haiche Company. Each company
would contribute $5 million to the venture in each of the next four years, but at the
end of Year 2, Jay has the right to turn the full venture over to Haiche. Jay should
evaluate this right as:

A) a timing option.
B) a flexibility option.
C) an abandonment option.
Explanation
An abandonment option allows a company to exit a project if it no longer expects
the project to provide a positive net present value going forward. A timing option
allows a company to delay a project. Flexibility options refer to changing prices,
output quantities, or production inputs.
(Module 26.2, LOS 26.d)

Question #66 of 180 Question ID: 1611742

Which of the following statements about return distributions is most accurate?

A) With positive skewness, the median is greater than the mean.

If skewness is positive, the average magnitude of positive deviations from the mean
B)
is smaller than the average magnitude of negative deviations from the mean.
If a return distribution has positive excess kurtosis and the analyst uses
C) statistical models that do not account for the fatter tails, the analyst will
underestimate the likelihood of extreme outcomes.
Explanation
If a return distribution has positive excess kurtosis, statistical models that do not
account for the fatter tails will underestimate the likelihood of very bad or very good
outcomes. A distribution with positive skewness will have a mean greater than the
median and larger average positive deviations than average negative deviations.
(Module 3.2, LOS 3.c)
Question #67 of 180 Question ID: 1611798

Compared to reporting in a country where life insurance payments on key employees

are deductible for tax, a company that makes such payments and reports in a country
in which they are not tax deductible would report:

A) a lower statutory tax rate.

B) a higher effective tax rate.
C) a greater deferred tax asset.
Explanation
In the case where insurance premiums paid are not tax deductible, taxes would be
higher so the effective tax rate (tax expense / pretax income) would be higher.
Expenses on the income statement that are not deductible for tax and will not
reverse are permanent differences and will not affect deferred tax items.
(Module 37.3, LOS 37.c)

Question #68 of 180 Question ID: 1611765

Assume that the spot exchange rate between the currency of Xyzia (XYZ) and the U.S.
dollar (USD) is 1.264 XYZ/USD, while the spot exchange rate between the euro (EUR)
and the USD is 1.083 EUR/USD. The XYZ/EUR exchange rate is closest to:

A) 0.857.
B) 1.167.
C) 1.369.
Explanation
The cross rate between two currencies (in this case, XYZ and EUR) can be calculated
as follows:
XYZ/EUR cross rate = (XYZ/USD) / (EUR/USD) = 1.264 / 1.083 = 1.167.
(Module 19.1, LOS 19.a)

Question #69 of 180 Question ID: 1611788

Which of the following is most likely presented on a common-size balance sheet or
common-size income statement?

A) Total asset turnover.

B) Operating profit margin.
C) Return on common equity.
Explanation
Operating profit margin can be read directly from a common-size income statement.
Asset turnover and return on equity mix balance sheet and income statement items.
(Module 30.5, LOS 30.e and Module 31.2, LOS 31.e)

Question #70 of 180 Question ID: 1611749

Ethyl Redd supervises an equity research team. Redd compiles the following
contingency table of recommendations from her fundamental and technical analysts:

Fundamental Analysts

Buy Hold Sell

Buy 28 12 4

Technical Analysts Hold 11 19 7

Sell 6 11 14

Using the data from this contingency table, Redd can most likely test the hypothesis
that her fundamental and technical analysts' recommendations are:

A) independent.
B) uncorrelated.
C) dispersed equally.
Explanation
Tests of independence are based on contingency tables. The analyst would use the
actual observations in the contingency table to calculate the expected observations
in each cell if the analysts' recommendations were independent, then calculate a
chi-square statistic to test the hypothesis that the recommendations are
independent. Independent variables are uncorrelated, but uncorrelated (no linear
relationship) variables are not necessarily independent.
(Module 9.1, LOS 9.b)

Question #71 of 180 Question ID: 1611773

A company has a two-tier structure for its board of directors. In this structure,
independent directors serve on which group within the board?

A) Staggered board.
B) Supervisory board.
C) Management board.
Explanation
The two-tier structure consists of a supervisory board and a management board.
The independent board members serve on the supervisory board, which oversees
the inside board members who serve on the management board. A staggered board
refers to the frequency with which individual board members are elected.
(Module 23.1, LOS 23.b)

Question #72 of 180 Question ID: 1611763

Three years ago, the U.S. dollar/euro exchange rate was 1.32 USD/EUR. Over the last
three years, the price level in the United States has increased by 18%, and the price
level in the eurozone has increased by 12%. If the current exchange rate is 1.40
USD/EUR, the real exchange rate over the period has:

increased, and eurozone goods are now more expensive to U.S.

A)
consumers.
B) decreased, and eurozone goods are now more expensive to U.S. consumers.
C) increased, and U.S. goods are now more expensive to eurozone consumers.
Explanation