CFA Level 1 Practice Question Bank by AnalystPrep - Questions

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Question 1

Ethical and Professional Standards

George Mendes is considering an employment offer made by DR Associates, an investment bank. Should Mendes accept the offer, he will be responsible for supervising twenty portfolio managers. Mendes’ only concern is that employees’ personal trades are not being adequately monitored and many of these transactions involve front-running clients’ trades.

To comply with the CFA Institute Standards of Professional Conduct, Mendes should most likely:

A) accept the offer and dismiss employees involved in front-running.
B) accept the offer and implement adequate compliance procedures.

C) decline the offer in writing until the firm adopts reasonable procedures to allow the exercise of his supervisory responsibilities.

Question 2

Ethical and Professional Standards

An investment management firm has been in existence for eight years. To enhance the quality of reported performance, the firm’s senior compliance officer decides to make the firm’s presented performance compliant with the GIPS standards.

To comply with the GIPS standards, the firm is required to initially present a GIPS-compliant performance track record of:

A) one year.
B) five years.

C) eight years.

Question 3

Quantitative Methods

You are presented with 2 investment opportunities and must choose the one with the greater present value: A lump-sum of $2 million or an annuity with 25 payments of $250,000 a year with the first payment starting today. The interest rate is 9% per year compounded annually.
Which one will you choose?

A) The annuity
B) The lump-sum
C) There’s no difference between the two options

Question 4

Economics

Two hypothetical currencies – ABC and XYZ – are trading at a spot rate of 1.60 ABC/XYZ . If the interest rate in ABC and XYZ’s countries are 7% and 5%, respectively, the arbitrage-free forward rate ABC/YXZ is closest to:

A) 1.5410.
B) 1.7113.
C) 1.6304.

Question 5

Financial Reporting and Analysis

Galactic Hyper is a chain of hypermarkets which sells most of its products for cash, which is why its days of sales outstanding are as low as 22 days. Assuming that the firm’s average receivables are $234,000, and the cost of goods sold (COGS) for the 1-year period is $1,245,000, the annual sales of Galactic are closest to:

A) $3,882,000.
B) $1,410,400.
C) $4,880,200.

Question 6

Corporate Finance

Birmingham Corporation is launching a new product with a social media marketing campaign that will cost $2,000,000. To finance the project, Birmingham’s CEO gathered the following information:

Required return on equity: 15%
Before-tax required return on debt: 7%
Birmingham’s tax bracket: 20%

If the CEO decides to issue $1,500,00 in new debt and $500,000 in common stocks, then the marginal weighted average cost of capital (WACC) is closest to:

A) 7.20%.
B) 7.95%.
C) 9.05%.

Question 7

Portfolio Management

Bruce Craig is in the business of trading steel in Chicago, which he inherited from his father one month ago. His financial adviser notes the following aspects of his situation:

– He is 24 years old;
– His investment horizon is 10-20 years;
– His primary objective for investing is aggressive growth;
– His business returns are not stable as he is not being able to take prudent business decisions.

Given the aforementioned information, which of the following statements is correct?

A) Craig has a low ability to take risk, but a high willingness to take risk.
B) Craig has a high ability to take risk, but a low willingness to take risk.
C) Craig has a high ability to take risk, but a high willingness to take risk.

Question 8

Equity Investments

Which of the following statements regarding market efficiency is least likely accurate?

A) In an efficient market, prices of stocks will slowly adjust to new information.
B) An efficient capital market reflects all of the information about its securities, including risk.
C) There are three forms of market efficiency: weak, semi-strong and strong.

Question 9

Fixed Income

A 3-year bond offers a 7% coupon rate with interests paid annually. Assuming the following sequence of spot rates, the price of the bond is closest to:

Time to Maturity Spot Rate (%)
1 4
2 5
3 5.5
A) 102.48
B) 106.74
C) 104.24

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