CFA Level 1 Mock Exam 1

Morning Paper
2014

Instructions

1. DO NOT turn over this page unless instructed.

2. The exam is of 3 hours duration. No candidate is allowed to leave the exam hall in the
first 30 minutes or in the final 30 minutes. If you wish to leave the exam hall within the
permitted times you must obtain the permission of the Proctor.
3. You will be given time warnings when there are 30 minutes and 10 minutes remaining.
4. You are to write your answers onto the separate answer sheet.
5. You may use the question paper for workings but are not permitted to make any marks
on the answer sheet other than to completely fill in the oval corresponding to your
response to each question.
6. You may use only a Texas Instruments BAII or Hewlett Packard 12C calculator.
7. You may not eat or drink in the exam hall.
8. Mobile phones must be switched off (Remember, in the real exam mobiles are not
permitted).
9. You must stop writing immediately when instructed to do so at the end of the
examination.
10. A separate answer book will be provided at the end of each exam. Once you have
marked you exam please e-mail your score to gmcdonald@lsbf.org.uk (Remember, in the
real exam you dont get to grade your own test!)
11. If you have any queries on any of the questions or answers please do contact Graham on
gmcdonald@lsbf.org.uk.
12. Your score does not matter; its what you find out along the way that counts.

The following 18 questions relate to Ethical and Professional Standards

1.

The CFA Institute Professional Conduct Program is covered by

A. The CFA Institute Bylaws

B. United States of America federal law
C. The local laws of whichever country members reside in

2.

Which circumstances can prompt an inquiry into member conduct?

A. Self disclosure of an oral complaint

B. Self disclosure of a written complaint
C. Oral complaints received from the general public

3.

What is the Designated Officer empowered to do?

A. Issue a cautionary letter

B. Apply a binding sanction
C. Suspend participation in the CFA program

4.

Which of the following is part of the Code of Ethics?

A. Members and Candidates have a duty of loyalty to their clients and must act with reasonable
care and exercise prudent judgment.
B. Members and Candidates must act for the benefit of their clients and place their clients
interests before their employers or their own interests.
C. Members and Candidates must promote the integrity of and uphold the rules governing
capital markets

5.

Gillian Greens employer AXN Investments, is acting as the lead manager for a bond
issue by one of its clients, Kirin Industries. Gillian discovers a discrepancy between the
first and second draft of Kirins most recent quarterly accounts; the discrepancy indicates
that Kirin is trying to hide significant losses for the quarter. Which of the following is
Gillians best of course of action?

A. Notify her supervisor in AXN Investments

B. Disassociate herself with any further dealings with Korin
C Notify an appropriate regulator

6.

Xander Moore is an equity analyst who is in the process of switching employers. He left
RedRock Investment Managers on 28 February and will take up his new position with
DDhS Advisors on 1 May. He is approached by the CEO of APS Camps, a rapidly
growing company offering sporting activities to the young, who asks Xander to write a
report on APS Camps. He would be paid a flat fee plus a percentage of any funds
received from share purchases following his report. What is Xanders best course of
action?

A. To accept the commission from APS Camps

B. To not accept the commission from APS Camps
C. Obtain approval from his new employer prior to accepting the commission from APS Camps

7.

At the end of last year Inge Woudstra set up a new Hedge Fund, called FundInge, using
the redundancy settlement she received from her previous employer as 50% of the funds
invested, the remainder being invested by friends and family members. Using complex
computerbased algorithms the fund generated returns of 12% above the benchmark
return of 5% and achieved a high Sharp Ratio
Inge wants to increase funds under management by offering the fund to new investors.
She back tests the algorithms for a three year period and finds that the fund would have
achieved similar levels of outperformance, in terms of return and Sharp ratios. She goes
on to calculate the Total Expense Ratio and Maximum Drawdown. Inge draws up
marketing material showing a four year performance history.
Has there been a breach of the Code and Standards?

A. No
B. Yes; Inge should have shown five rather than four years performance history
C. Yes; if Inge failed to disclose that three of the four years were based on simulated rather than
actual performance.

8.

Gabi Miklichansky is the Research Director at GMM Capital Advisors, a consultancy

which offers research on fixed income strategies and particularly sovereign bonds.
Gabi asks her product structuring team to devise a strategy that will benefit from rising
interest rates. She is impressed by the complex product they produce which uses a
combination of putable bonds, buying bonds with warrants attached and selling the
warrants and selling T-bill futures.
Gabi markets the fund and illustrates the returns that would be expected under a series
of different higher-yield scenarios. She clearly states that this is modelled as opposed to
actual data. She does not describe the process in detail citing its complexity and
proprietorial nature. She also states that in her opinion there is no downside risk as
the path of interest rates is set to increase.
Has there been a breach of the code and standards?

A. No; she has clearly indicated this is model data

B. No; she has clearly stated that it is her opinion that interest rates will rise. Clients of the
opinion rates will fall or stay on hold can avoid the product.
C. Yes; her report fails to adequately describe the characteristics of the actual and implied risks of
the investment product.

9.

Why were the GIPS created?

A. To standardise accounting standards globally

B. To penalize insufficient disclosure of information
C. To allow investors to make meaningful comparisons between firms

10.

To claim compliance with GIPS a firm must?

A. State that it is compliant

B. Ask their compliance officer to confirm compliance
C. Hire an independent third party to verify compliance

11.

Jonny Uden is the Chief Investment Officer of Melrose Asset Management, a large
whole-market equity fund. The firm has recently lost a number of key personnel who
specialized in the small- and medium-cap sectors of the market. Given volatile market
conditions, Jonny decides that his best course of action is to sell off the small-cap and
medium-cap holdings and concentrate in large-cap stocks.
Jonny identifies suitable fund managers for these small- and mid-sized stocks and
allocates the appropriate share of the total funds.
He then instructs his firms marketing department to notify all clients of the reason for
the change, that there will be a net reduction in portfolio costs and the basis for selecting
the fund managers.
He then instructs senior portfolio managers to contact clients directly, contacting first
those clients with the highest assets under management

A No.
B. Yes; if Melrose is established as an equity fund it is not permitted under the code and
standards to use secondary managers.
C. Yes; Jonny failed to obtain client approval prior to the change in mandate and because he is
not ensuring that clients are being communicated with fairly.

12.

Which of the following can claim compliance with GIPS?

Asset managers

II

Investment Consultants

III

Performance Measurement Software Providers

A. I only
B. I and II only
C. I and III only

13. Lotte Sondstroem has recently been appointed as the Chief Investment Officer of JSM
Investments. The firm has promoted itself as aiming to outperform its benchmark by
running aggressive, actively-traded funds with a very high portfolio turnover rate to
capture market mis-pricings. A combination of poor decisions and high transaction costs
has left JSM in the bottom quartile of performance for each of the last four years.
Lotte instructs that the firm reduces its portfolio turnover rate significantly and adopt a
Core-Satellite approach .This involves holding a portfolio which largely replicated the
index and then taking active bets on a few instances where they are confident of a
mispricing. Lotte reasons the reduced transaction costs will increase net-of-fees returns
to investors.
Lotte updates the marketing material for new clients and will fully disclose the change to
existing clients when they receive their annual statement.
Is there a breach of the Code and Standards?
A. Yes; Lotte has failed to notify her clients of the change in investment methodology in advance
B. Yes; Lotte has failed to notify her clients of the change in investment methodology in a timely
manner
C. No; Lotte is acting in her clients best interests and in line with the semi-strong form of the
Efficient Market Hypothesis

14.

Which of the following statements is true?

A. Portfolios should be added to composites as soon as the portfolios investment return

characteristics are known.
B. Portfolios should be added to composites as soon as the clients investment objectives are
known.
C. Portfolios should be removed from composites as soon as the portfolio is terminated.

15 Dan Maddocks is Head of Trading at CherryWood investments. On 8 November

CherryWood send out a research note on Pluriel Inc, changing their recommendation from
Neutral to Outperform.
On 9 November they receive an order from a full-service client (who was sent the report) to sell
Pluriel. Dan should
A. Process the order as it is an execution only instruction from a client
B. Refuse to process the order as it contrary to the firms own recommendation.
C. Process the order having explained the recent change in recommendation.

16.

Mary Nicol is the Head of Research at Four Square Capital (FSC). She is approached by
the Head of Investment Banking at FSC and asked to change an investment
recommendation on NWK, a firm on which FSC provides research coverage, from Sell
to Buy. The Sell recommendation is inconsistent with FSC acting as a joint book-runner
on a rights issue being offered by NWK. Marys best course of action would be to:

A. Appoint a new analyst to check whether the initial recommendation for NWK was correct or
needed to be updated
B. Discontinue offering coverage on NWK but responding to requests for factual information
from clients to whom the research had already been given.
C. Change the investment recommendation in line with FSC Investment Banking
recommendation.

17. Pam Ring has been appointed a supervisor in her firm. Many, but not all, of those she
supervises are subject to the CFA Code and Standards. Which of the following statements is
true?
A. She can only delegate responsibilities to those subordinates who are covered by the Code and
Standards
B. She is able to delegate responsibilities to all of her subordinates and is required to monitor all
subordinates.
C. She is able to delegate responsibilities to all of her subordinates but would only be required to
monitor those subordinates who are not covered by the Code and Standards

18.

Toby Logan has been appointed to manage the Occupational Pension Scheme of Ealing
Media. His duty of loyalty, prudence and car is due to:

A. The shareowners of Ealing Media

B. The trustees of the Ealing Media Occupational Pension Scheme
C. The members and beneficiaries of the Ealing Media Occupational Pension Scheme

The following 14 questions relate to Quantitative Methods

19.

Which of the following correctly calculates the Sharp ratio of risk-adjusted returns?

A. Residual Return divided by Residual Risk

B. Return in excess of the risk-free rate all divided by the risk of the market
C. Return in excess of the risk-free rate all divided by the risk of the portfolio.

20.

The sum of deviations from the mean is zero for the

A. Sample and population means

B. Geometric and harmonic means
C. Weighted average mean and mode

21.

A fat-tailed distribution could also be described as which of the following?

A. Leptokurtic
B. Platykurtic
C. Mesokurtic

22.

Regarding Technical Analysis which of the following statements is true?

A. When a short-term moving average crosses from underneath a longer-term moving average
the movement is considered bearish and is known as a dead cross
B. When a short-term moving average crosses from above a longer-term moving average the
movement is considered bullish and is known as a golden cross
C. A longer-term investor using Bollinger bands as part of their strategy would be likely to buy
securities that had broken through the lower Bollinger band

23.

Which of the following portfolios maximizes Roys Safety First criterion, if your
threshold return is todays inflation rate of 3%?

A. Expected Return 12%, Variance 9%

B. Expected Return 16%, Variance 16%
C. Expected Return 8%, Variance 4%

24.

Given a stated monthly rate of 0.33333%, what is the effective rate with continuous
compounding?

A. 1.04081%
B. 4.08108%
C. 5.45979%

25.

What is the main advantage of Monte Carlo over historical simulation?

A. It uses actual data

B. It does not need detailed estimates of parameters
C. It can explore hypothetical what if scenarios

26.

The Students t-distribution is best described as being

A. Symmetrical, thinner tailed than a normal distribution, n-2 degrees of freedom

B. Asymmetrical, fatter tailed than a normal distribution, n-1 degrees of freedom
C. Symmetrical, fatter tailed than a normal distribution, n-1 degrees of freedom

27.

A type one error involves:

A. Accepting a false null hypothesis and is less likely with a higher level of significance
B. Rejecting a true null hypothesis and is less likely with a higher level of significance
C. Rejecting a true null hypothesis and is less likely with a lower level of significance

28.

When the population variance is known and normally distributed, which test for its mean
is most appropriate?

A. Z test
B. T test
C. Chi squared test

29.

A
B
C
30.

To test whether two populations have the same variance, which test is used, and what
shape is its distribution?
Test

Shape of Distribution

F Test
F Test
Chi Squared

Symmetrical
Asymmetrical
Asymmetrical

What is the minimum value for the Chi Squared statistics and F statistics?

A. 0
B. 3
C. Infinitely negative

31.

Gala Nasr is saving for retirement. She is currently 40 years old and intends to retire fully
at 65 having cut down on her work once she reaches 60. She intends saving $20,000 at
the end of each year until she is 60 (20 payments). When she reaches 60 her salary will be
reduced to cover her living expenses but not provide for further saving however her
pension fund will grow throughout at 7%. The amount available on her 65th birthday to
purchase a pension will be closest to:

$819,909.84

$1,149,965.97

$1,264,980.75

32.

Smarts Msimang is planning for his retirement. Smarts is celebrating his 25th birthday by
doing some retirement planning. He considers that he will be able to afford savings of
$1,500 at the end of each of the next 15 years and is willing to take risks in order to earn
a return of 11% over this time. He considers that when he is in his 40s he will be able to
save more but take less risk. He wishes to retire at 65 and with a pension fund of
$750,000. Assuming he can earn an 8% return in this second saving phase what should
Smarts be aiming to save in this second 25-year period?

$5,424.51

$5,858.47

$15,093.66

The following 12 questions relate to Economics

33.

Which of the following would appear to be correctly specified as a supply function?

Q = -7 + 25Price 14 Input costs

Q = -7 + 25Price + 14 Input costs

Q = -7 - 25Price 14 Input costs

34.

Calculate the four firm concentration ratio and the Herfindahl-Hirschman concentration
index for the following industry.
Mobile Networks
Orange
T Mobile
O2
Vodafone

Market Shares (%)

15
20
25
30

A.

75, 0.2150

B.

90, 0.2150

C.

90, 0.2850

35.

Which of the following statements is true?

For inferior goods, the income and substitution effects are reinforcing

For Giffen goods, the income effect can offset the substitution effect

For Giffen goods, the income effect does offset the substitution effect

36.

Which of the following are best described as renewable natural resources?

A.

Norwegian water reserves

B.

Liquid, transportable, natural gas from Qatar

C.

Industrial coking-grade coal used for steel making

37.

You are required to compute a Laspeyre index to base 100 for the following twoproduct basket

Pizza
Pasta

Price
(Base year)
5
1

Quantity consumed
(Base year)
20
50

Price
(Current)
7.5
1.25

Quantity consumed
(Current)
15
60

125

138.89

141.67

38.

How many and which of the following biases are most likely to lead reported CPI figures
to overstate inflation?
I Quality change bias
II New goods bias
III Commodity substitution bias

A.

I only

B.

I and III only

C.

I, II and III

39.

Why might real GDP differ from potential GDP in the macroeconomic short run?

A.

All money prices are sticky

B.

Some money prices are sticky

C.

Some real prices are sticky

40.

To tighten monetary policy, the Federal Reserve is most likely to

A.

Increase the discount rate

B.

Use open market operations to sell Treasury Bills

C.

Increase required reserve ratios

41.

A government expenditure stimulus, delivered as part of a balanced budget multiplier will

most likely

A.

Be counterproductive, due to the crowding out effect

Be expansionary, provided household Marginal Propensity to Consume is >1

Be successful provided household Marginal Propensity to Consume is <1

42.

If money supply increases by 10% and the velocity of money reduces by 5%, given that
output is in the short term fixed, the most likely change in the price level is?

A. 0%
B. +5%
C. -5%

43 You are required to compute a 6 month forward rate for USD/GBP given a spot rate of
USD/GBP 1.5275 a 4% UK interest rate and a 2% US interest rate
The 6 month forward rate would be closest to:
A USD/GBP 1.5426
B USD/GBP 1.4981
C USD/GBP 1.5125

44 According to the Riccardian model of international trade, countries should specialise in the
production of items in which the country has
A An absolute advantage
B A comparative advantage
C A relatively greater abundance of the factor of production required to make that item

The following 34 questions relate to Financial Reporting Analysis and Corporate Finance
45.

At the end of an accounting period a law firm reports chargeable hours worked as
revenue in the Income Statement, before the client has been billed for the work. Which
of the following statements is true?

A. The unbilled revenue would also be shown on the balance sheet as an asset
B. The unbilled revenue would also be shown on the balance sheet as a liability
C. This would be an example of aggressive accounting and low financial reporting quality

46.

Which of the following is not a common approach to the creation and maintenance of
Financial Reporting Standards?

A. A rules-based approach
B. A principles-based approach
C. An asset/liability approach

47.

Matt Leedham is an analyst who covers the aviation sector. Most airlines which he
follows use lease finance to acquire their fleet of aircraft with around 50% of firms
reporting their leases as Operating Leases and the rest as Capital (Finance) leases. Which
of the three classifications of cash flow could be compared directly, without having to
make any adjustment for the type of lease classification?

A. Investing Cash Flows

B. Operating Cash Flows
C. Financing Cash Flows

48.

Where would you be most likely to find disclosures of a company's significant accounting
policies?

A. Footnotes
B. FASB website
C. Management Discussion and Analysis

49.

In 2008 ROS Properties bought land for $6,000,000. They have successfully applied to
have its permitted use changed to residential and sold it in 2014 to Becca Developers for
$15,000,000. Becca will pay $3,000,000 as a down-payment with the balance payable in
two years time when they hope to have sold on the completed development.
What profit is ROS Properties able to report in 2014 under the installment method?

A. Nil
B. $1,800,000
C. $9,000,000

50.

Throughout its financial year 2014 Fountain Engineering had 100,000,000 shares
outstanding. They also had issued to employees 200,000 stock options with an exercise
price of $25. The average market price over the year was $40. When computing diluted
earnings per share the number of shares to be used in the denominator is closest to?

A. 100,000,000
B. 100.075,000
C. 100,120,000

51.
Which of the following would most likely reduce a recorded pension fund liability? An
increase in
A Inflation
B Life expectancy
C Interest rates

52.

Which of the following statements is true?

A. Cross sectional analysis uses a vertical common size statement and time series analysis uses a
horizontal common size statement.
B. Cross sectional analysis uses a horizontal common size statement and time series analysis uses
a vertical common size statement.
C. Cross sectional analysis uses a vertical common size statement and time series analysis uses a
vertical common size statement.

53.

The lowest debt ratio (by numeric value) for most companies is likely to be

A. Debt to equity
B. Debt to total assets
C. Debt to net assets

54.

Credit rating analysts are most likely to look at which of the following ratios?

A. Price to earnings
B. Price to Cashflow ratios
C. EBITDA interest coverage

55.

Which of the following is the most conservative measure of liquidity?

A. Cash Ratio
B. Quick Ratio
C. Current Ratio

56.

Acre Agriculture reported a salary expense of 3,000,000 for the year, opening salaries
payable of 200,000 and ending salaries payable of 120,000.
Cash paid to employees is closest to:

A. 2,920,000
B. 3,080,000
C. 3,200,000

57

Dagmar Inc. recently reported deferred tax assets of $325,000 and deferred tax liabilities
of $430,000. These values are similar to those reported in previous years. Dagmar
anticipates a reduction in the rates of tax payable. This would result in:

A. A strengthening of the balance sheet but an increased tax expense

B. A strengthening of the Balance Sheet and a reduced tax expense
C. A weakening of the Balance Sheet and a reduced tax expense

58.

What will be the most likely relationship between pre-tax operating cash flow and the
reported tax expense for a firm reporting using LIFO, compared to a firm which uses
FIFO but is in all other respects identical?
A
B
C

59.

Pre-tax Operating Cash Flow

Same
Same
Higher

Tax Expense
Lower
Higher
Same

In pension accounting which of the following is likely to have the smallest impact on the
reported pension expense?

A Interest expense
B Service cost
C Actuarial gains/losses

60.

Impairment losses are most likely to impact which of the following primary financial
statements?

A. Income statement and Statement of Cash Flows

B. Income Statement and Balance Sheet
C. Statement of Cash flows and Balance sheet

61.

Crescent Circuits is engaged in a business where it receives cash from customers which is
taxable on receipt but not recognized in the Income Statement until the customer
receives delivery of the completed product. This is most likely to result in:

A. A deferred tax asset and a current asset of deferred revenue

B. A deferred tax liability and a current asset of deferred revenue
C. A deferred tax asset and a current liability of deferred revenue

62.

Two years ago, Glendale Golf issued a 10-year bond paying a fixed 7% coupon and
callable at par on the coupon payment dates 1, 3 and 5 years prior to maturity. The bond
was issued at par but yields have steadily fallen.

An analyst using the amounts recorded on the firms Balance Sheet is most likely to:
A. Have a proper understanding of the firms liabilities
B. Be over-estimating the value of the firms liabilities
C. Be under-estimating the value of the firms liabilities

63.

Which of the following would most likely be classified as an Investment Property?

A. A construction firms completed properties being held for resale

B. A major multi-national buying the freehold of an iconic city centre building for prestige and
long-term capital appreciation
C. A warehouse purchased under a finance lease and being rented out to a number of small
tenants.

64.

ELM operate a defined benefit pension scheme which has plan assets with a fair market
value of $20m and pension benefit obligations with a present value of $22m. How would
the pension scheme be reflected on ELMs Balance Sheet?

A. The Balance Sheet would report the plan assets and plan liabilities as a single line item
(liability $2m).
B. The Balance Sheet would report two separate line items, one for the plan assets and the other
for the plan liabilities
C. The Balance Sheet would report only the $22m liability as ELM does not have the right to use
the pension schemes plan assets

65.

Under US GAAP bonds issued with warrants are accounted for

A. As two separate securities

B. In the same way as a convertible bond is treated under US GAAP
C. In the same way as straight corporate debt

66.

You have gathered the following data from the footnote disclosures of Willoughby
Industries.
Inventory
LIFO Reserve
Tax Rate
Cost of Goods Sold
Operating Income
Net Income

2014
$130,000
$38,000
20%
$1,365,000
$226,000
$53,000

2013
$120,000
$35,000
20%
$1,235,000
$232,000
$51,000

What figure should be reported as the FIFO-equivalent inventory value for 2014?
A. $155,000
B. $133,000
C. $168,000

67.

Which of the following would be considered a form of off-balance sheet financing?

A. The use of operating leases

B. The with-recourse sale of accounts receivable
C. The issue of zero-coupon bonds

68.

Tom Logan, an analyst, gathered the following information about a firm (Millions)

Cost of Fixed Asset Investments

Accumulated Depreciation Expense

2013
5.6
2.4

2014
5.6
3.2

At the end of 2014 the best estimate of the firms average age and depreciable life of its
assets is:

A.
B.
C.

Average Age
1.75 years
3.33 years
4 years

Depreciable Life
7 Years
6 years
7 years

69.

Which problems may arise from the IRR investment criterion for projects with positive
cash flows, after negative cashflows, after positive cashflows?

I No IRR solution
II Multiple IRR solutions
A. I
B. II
C. Both I and II

70.

Clifton Inc currently operates with a WACC of 12.2%. equity comprises 60% of the
Capital Employed with the remainder coming from debt at an after tax cost of 8%. They
are considering issuing $50m in new equity to finance a major expansion. They are of the
opinion that investors would require a return of 12% on the newly issued equity when
they learn of the low-risk and cash-generative nature of the new project. The advisors to
the issue will charge a fee of 3%.
Assuming the new equity can be issued with a 12% required return, which of the
following is true?
A. There will be no relevant cash flow to consider but a reduction to the firms WACC
B. There will be a relevant cash flow to consider but no adjustment required to the firms
WACC
C. There will be a relevant cash flow to consider and a reduction to the firms WACC

71.

Which of the following is best described as a primary source of liquidity?

A. Trade credit
B. Asset liquidations
C. Bankruptcy protection

72.

For large, followed and highly rated businesses which is most likely cheapest source of
short term funding?

A. Commercial paper
B. Discounted receivables
C. Non-bank finance companies

73.

When it comes to hiring third party consultants, best practice suggests that directors:

A. Should be able to subject to management approval

B. Should be able to subject to executive directors approval
C. Should be able to without approval from any management executives

74.

Related party transactions must be disclosed in

A. Proxy reports
B. Annual reports
C. All communications with shareowners

75.

Which of the below correctly completes this sentence?

From a shareholder perspective, golden parachutes, greenmail and poison pills are____
A. Useful defences against hostile bids
B. Designed to maximise shareholder value
C. Potentially damaging to shareholder interests

76.

Gezo Inc raises capital in both the equity and fixed income markets. Using the data in
the table below the appropriate weights to use when computing the firms WACC would
be:

Number in issue
Nominal value
Issue price
Market price

Shares

Bonds

2,000,000
$1
$10
$11

50,000
$1000
$1010
$990

A.

4% equity; 96% debt.

B.

28% equity; 72% debt

C.

31% equity; 69% debt

77.

Last year Fratelli BV had sales of 65m. Helen Archer, an analyst, forecasts sales growth
will be 3%, EBITDA margin to be 35%, interest of 2.4m, depreciation to be 1.8m and
taxes at 20% If Fratelli has 1m shares in issue and trades on a leading P/E multiple of 7x
its shares should be worth?

A. 103.88
B. 107.70
C. 134.63

78.

Porters plc has a current ratio of 2.0 and a quick ratio of 1.5. Its current liabilities are
75m. Its inventory should be closest to:

A. 37.5m
B. 62.5m
C. 75m

The following 36 questions relate to Asset Valuation

79.

You buy 1000 Microsoft at $30 per share on 50% initial margin and 25% maintenance
margin.
What Microsoft share price would trigger a margin call?
And what profit would you earn (ignoring margin interest and brokerage) if an investor
who had purchased outright Microsoft shares at the same time made a 25% return?

A. $11.25; $22,500
B. $20; $22,500
C. $20; $7,500

80.

The Korean stock-market has very high trading volumes and very low trading costs commissions, taxes and spreads are all low. Yet sometimes stocks take a few days to reprice in response to significant news about global investors block trades. Which
statement most accurately describes this market?
I This market shows internal efficiency
II This market shows external efficiency

A. I only
B. II only
C. Both I and II

81.

Which of the following statements is true?

A. Commodity indices are based on the weighted-average market price of a basket of

commodities
B. Replicating a commodity index is relatively easy provided the portfolio of commodities held at
the start of the period reflects the weights used in the index calculation
C. Commodity indices frequently have low correlations to the performance of the underlying
commodities

82.

Which of the following would be a valid criticism of a free-float adjusted market

capitalization equity index?

A. The shares available to trade can change over time leading to index volatility
B. The free-float adjusted index will be difficult to replicate as the portfolio manager might not
know the proportions of each constituent stock to hold
C. The shares in the index that rise in value have an increasing weight in the index and may cause
investors to become overweight in securities that are overvalued and underweight in
securities that are undervalued

83.

You are considering making an investment in IOS stock; a firm where you would require
a 9% return.
IOS has just paid a dividend of $4 and you expect this dividend will grow at the
foreseeable future at 5%.IOS Weighted Average cost of Capital is 8%. Using the
dividend Discount model the price you should pay is closest to?

A. $100
B. $105
C. $140

84.

A carbon emissions trading exchange is expected to grow free cash flow to equity of $2
share by 25 percent a year for the next two years, and 15 percent a year for the following
two, before being taken over in 4 years time by a larger exchange for $10 per share. The
weighted average cost of capital is 8 percent and the required return on equity is 12
percent. What is the most accurate valuation?

A. $ 15.99
B. $ 16.26
C. $ 18.23

85

AWM is a software firm that develops specialist software used in ophthalmic medicine.to
diagnose and record the progress of patients eye disease. The firms main customers are
European state-owned health services. It was formed when three highly skilled
developers broke away from a larger software group several years ago and has now
grown to employer over 200people, including 32 industry-recognized experts.
AWM regularly makes low profits. Management would prefer higher profits but on-going
software development, required to stay ahead of the firms three main rivals, is expensive.
According to Porters Five Forces model AWM operates in an industry with

A High supplier power, but low threat of new entrants

B High buyer power and high supplier power
C High buyer power and a high threat of new entrants

86

A market has the following limit orders.

Buyer
Ken
Jim
Mike

Bid Size
450
500
300

Limit Price
19.66
19.68
19.71
19.72
19.73
19.84
19.99

Offer Size

Seller

250
150
400
800

Rita
Sue
Bob
Tzhu

Alexandra places a day order to sell 600, Limit 19.68. Assuming no other orders are
placed for the stock that day the average price Alexandra will get is closest to?
A 19.67
B 19.68
C 19.70

87.

Shares in ECM are currently trading on a forward P/E multiple of 5.2. The firm
generates growth consistent with a Return on Equity of 12% and a Dividend Retention
Rate of 30%. If investors require a return of 15% ECMs justified P/E multiple using the
DDM and your trading decision would be, assuming you are permitted to sell ECM
stock short?

A
B
C

88.

Justified P/E
4.55
6.14
6.14

Trading Decision
Sell
Sell
Buy

Price to book value is the most appropriate valuation measure for which of the following
companies?

Advertising Agency
Large Media/Entertainment
Group (no longer going
concern)
Global Logistics firm
A. Advertising agency
B. Media/Entertainment Group
C. Global Logistics

2013 Net Income (m)

12.8

2014 Net Income

99.3

--23.2

Ceased trading;

14.2

14.4

89.

Calculate the most accurate figure that is closest to price to book value for the common
stock of the following firm.

Shares at 1st January 2013

Tangible Shareholder's equity at 31 Dec 2013
Intangible Shareholders equity
Preferred stock at 31 Dec 2013
Share buy backs during 2013
Rights issue during 2013
Share price at 31 Dec 2013

500,000
$60 million
$75 million
15 million
200,000
100,000
$240

A. 0.8
B. 1
C. 2.133

90.

Given the following data is the most accurate estimate of earnings growth for the
Japanese stock market?
Dividend payout rate 40%

Net profit margin 2%

Asset turnover 6

Financial Leverage 3

A. 14.4%
B. 21.6%
C. 36%
91.

Given the following stated spot rates and forward rates you are required to compute the
stated annual forward rate for the six-month starting in two years time
Time period
6 month
12 month
18month
24 month
30 month
36 month

A 2.4%
B 4.8%
C 6.2%

Spot Rate
3.2%
3.4%
3.6%
3.8%
4.0%
4.2%

92.

A futures market is most likely to be in backwardation where

A Prices are reasonably stable

B The convenience yield is high
C The convenience yield is low.

93.

Which of the following would not be classified as an Alternative Investment?

A. Shares in an Exchange Traded Fund investing in Commodities

B. Shares in a commodity consumer
C. Physically holding a commodity such as gold, silver or other precious metals.

94.

A wealthy investor has a choice of investing $100,000 directly into each of 10 separate
hedge funds or $1,000,000 into 1 fund-of-hedge-funds. Which of the following would
most likely be an advantage of investing in the fund-of-funds compared to the individual
funds?

A The fund-of-fund structure should give a diversification benefit improving the net-of-fees
returns to the portfolio.
B The fund-of-fund structure is likely to offer better redemption terms
C The fund-of-fund structure is more suitable for individual investors; most hedge funds are
only permitted to accept money from institutional clients only.

95.

Which of the following hedge fund features would not be considered an advantage to a
hedge fund investor?

A A side pocket
B A hurdle rate
C A water mark

96.

If your opinion is bearish, neutral and bullish on Barclays Bank stock, which options, if
any, would you be most likely to BUY in each case?

A. Puts, none, calls

B. Calls, none, put
C. Puts, puts and calls, calls

97.

The Northern Rock share price is 600p when an option changes hands. A 550p put
option costs 50p to buy. What is the most accurate figure for the maximum profit if you
buy the put and the maximum loss if you sell it? Assume it is held to expiry.

A. 500p, -500p
B. 550p, -550p
C. -600p, infinite

98.

Interest rates are so low in Japan that you borrow Yen 100,000,000 fixed at 1% for three
years.
You enter a fixed for fixed currency swap with Credit Suisse, swapping the Yen in return
for SFR 1,000,000 at a fixed 2% interest payable yearly in advance. The Swiss franc
appreciates ten percent against the Yen by the end of first year and thirty percent when
the swap terminates at the end of the third year.
What are the most likely payments you make to Credit Suisse at the end of years one and
three?

A. SFR20 000 SFR 1 million

B. SFR20,000, SFR1.3 million
C. SFR10,000; SFR1 million

99.

Which most accurately describes a limited risk strategy for profiting from a view on
interest rates?

A. Buy a cap for falling rates. Buy a floor for rising rates
B. Buy a cap for rising rates. Buy a floor for falling rates
C. Sell a cap for falling rates. Sell a floor for rising rates.

100

Which of the following would be an end user of derivatives and which would be a
dealer?
X Citigroup wants to hedge its floating rate interest rate risk with a $US20 billion swap.
Y Nigerias central bank seeks to make a 0.02 percent profit from the bid ask spread on a
currency swap
Z the World Bank needs to fix its Tanzanian Schilling exchange rate to fix the costs of
building a bridge

A. X dealer, y and z end user

B. X and z end user, y dealer
C. X end user, y and z dealer

101.

You purchase a 1X4 FRA at 3% on a notional principal of $1,000,000. At expiry the 90

day LIBOR rate is 6%. Which figure is closest to your profit or loss?

A. -$7,389
B. $7,444
C. $7,389

102.

Is the repo rate likely to be higher or lower than bank borrowing rates? Why is it most
likely to differ from bank borrowing rates?

.A Lower, because its overnight

B. Lower, because its collateralised
C. Higher, because its not collateralised

103.

Moodys says it wants to cut credit ratings on Greek Government bonds. This is best
described as an example of which type of risk?

A. Default
B. Downgrade
C. Credit Spread

104.

If you are a US investor what is the main extra risk to you take on buying a Coca Cola
bond paying coupons in Japanese Yen?

A. Japanese political risk

B. Japanese sovereign risk
C. Yen foreign currency risk

105.

Which of the following is best described as event risk?

A. An issuer is taken over

B. An issuer calls back a bond
C. Inflation rates accelerate rapidly

106.

An asset-backed security generally requires

A. Backing by hard tangible assets such as property

B. A special purpose vehicle to hold the collateral remotely from the issuer
C. Credit enhancements such as external guarantees or internal over-collateralization

107.

Tom Logan, a fixed income analyst, states: All bonds have positive convexity apart from
callable bonds in a rising yield environment
Julian Cooke, another analyst, states: MacAulay duration should only be used to
measure the interest rate risk of bonds with embedded options
Who is correct?

Tom but not Julian

Julian but not Tom

Neither Tom nor Julian.

108.

The price of a three year zero-coupon bond with a stated annual yield to maturity of
4.5% is closest to:

A. 87.50243
B. 87.62966
C. 93.12759

109.

Given the following term structure the price of a 2 year zero coupon bond is closest to:

Maturity
6 months
12 months
18 months
24 months
30 months
36 months

Stated
Spot Rate
(%)
4
5
6
7
8
9

A. 86.94432
B. 87.14422
C. 87.34387

110.

Using the term structure from question 109, the price of a two-year semi-annual10%
coupon bond is closest to:

A. 101.38096
B. 105.95064
C. 105.73817

111.

Using the term structure from question 109 the 6 month forward rate starting in 24
months time is closest to:

A. 6.02%
B.11.75%
C.12.04%

112.

A callable bond is likely to have a z-spread which is

A. Less than its option adjusted spread

B. More than its option adjusted spread
C. Equal to the option adjusted spread but higher than its nominal spread

113.

Julian Cook, an analyst, states When interest rates rise dramatically callable bonds will
exhibit negative convexity. He goes on to state The higher the level of interest rates the
higher the price volatility of a bond for any further interest rate changes
Julian is:

A. Correct with respect to negative convexity and correct with respect to price volatility
B. Correct with respect to negative convexity but incorrect with respect to price volatility
C. Incorrect with respect to negative convexity and incorrect with respect to price volatility

114.

Which bond will have the highest convexity?

A. A 5 year 3% coupon bond with a YTM of 8%

B.A 10 year 3% coupon bond with a YTM of 5%
C. A 10 year zero coupon bond with a YTM of 5%

The following 6 questions relate to Portfolio Management

115. The market portfolio contains:
A. An Equal weighted combination of all risky assets
B. A Market value weighted combination of all risky assets
C. A Mean-Variance Optimized combination of all risky assets

116 A policy statement can help with

A. Performance evaluation
B. Performance measurement
C. Performance verification checks

117. Older people are likely to have:

A. Lower risk appetite and lower liquidity requirements compared with younger people
B. Lower risk appetite and higher liquidity requirements compared with younger people
C. Higher risk appetite and higher liquidity requirements compared with younger people

118. Capital appreciation is best described as a desire to grow investments

A. Faster than the risk free rate
B. Faster than the rate of inflation
C. Faster than the S&P500 us equity index

119. What is the standard deviation of the following two asset portfolio?
Asset
Expected Return
Standard deviation
Weight
Covariance

1
12%
16%
30%

2
15%
19%
70%
91.2

A. 8%
B. 13%
C. 15%

120. What percentage of funds returns over time can be explained by their target asset allocation
policy?
A. 50%
B. 70%
C. 90%