CFA Level 1 Question Bank by AnalystPrep - Solutions

Question 1

Correct Answer: B) accept the offer and implement adequate compliance procedures.

Although the front-running client trades constitutes a violation of the CFA Institute Standards of Professional Conduct, this does not mean that Mendes cannot discharge his supervisory responsibilities. His best course of action would be to accept the position offered and implement adequate compliance procedures.

Option C is incorrect. Since Mendes will be able to discharge his supervisory responsibilities despite front-running by employees, declining supervisory responsibilities in writing is not a recommended course of action.

Option A is incorrect. Dismissal is the course of action which is inconsistent with the CFA Institute Standards of Professional Conduct. Once a supervisor learns that an employee has violated the Code and Standards, the supervisor should promptly initiate an assessment to determine the extent of the wrongdoing.

Question 2

Correct Answer: B) five years.

To comply with the GIPS standards, the firm is initially required to present a GIPS-compliant performance track record of five years and present an additional year of performance each year going forward, building up to a minimum of 10 years of GIPS-compliant performance.

Question 3

Correct Answer: A) The annuity

The first option’s present value (PV) is $2,000,000.

The second option is an annuity due with 25 payments, which means an immediate $250,000 at time t=0 plus an ordinary annuity of $250,000 per year for 24 years. The present value of the second option is: PV = $250,000+A*((1-1/(1+r)N)/r) = $2,676,652.90, where A=250,000, N=24, r=9%=0.09.

Question 4

Correct Answer: C) 1.6304.

The arbitrage-free forward exchange rate can be calculated as the spot rate (ABC/XYZ) * (ABC interest rate / XYZ interest rate).
The arbitrage-free forward rate for ABC/XYZ is (1.60 * 1.07/1.05) = 1.6304.

Question 5

Correct Answer: A) $3,882,000.

Since Days sales outstanding = 365 / Receivables Turnover = 365 / (Annual sales / Avg. acc. rec.),
we can rearrange the formula as:
Annual sales = [(365 / Days sales outstanding ) * Average acc. rec.]
Annual sales = 365/22 * $234,000 = $3,882,000

Question 6

Correct Answer: B) 7.95%.

To solve this question, we need to use the WACC formula:
WACC = wdrd*(1-T) + wsrs + wprp
WACC = (0.75)(7%)(1-0.2) + (0.25)(15%) = 4.2% + 3.75% = 7.95%

Question 7

Correct Answer: A) Craig has a low ability to take risk, but a high willingness to take risk.

As Craig’s business returns are not stable, he has a low ability to take risk. However, his age factor, time horizon and investment goal suggest a high willingness to take risk.

Question 8

Correct Answer: A) In an efficient market, prices of stocks will slowly adjust to new information. 

Therefore, option A is the least likely option, as stated in the question.

Question 9

Correct Answer: C) 104.24

PBond = 7/(1+0.04)1 + 7/(1+0.05)2 + 107/(1+0.055)3
PBond = 104.24

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