Mock Test 1 – CFA Level I

Afternoon Session

Topics Questions Points

Ethics and Professional Standard 1-18 27

Quantitative Analysis 19-32 21

Economics 33-44 18

Financial Reporting and Analysis 45-68 36

Corporate Finance 69-78 15

Equity Investment 79-90 18

Derivatives 91-96 9

Fixed Income 97-108 18

Alternative Investment 109-114 9

Portfolio Management 115-120 9

ETHICS AND PROFESSIONAL STANDARD QUESTIONS

1. Collin Nel, CFA has tendered his resignation to his current employer Farrell Capital Advisors
& is serving the mandatory three-month notice period. He is planning to open his
independent asset management firm. While serving the notice period he undertakes a few
activities. Which of the following activity is least likely a violation of Standard IV (A) –
Loyalty to Employer?

A. Making a copy of the marketing material of Farrell which highlights his performance.
B. Buying premises for his new firm.
C. Retaining the computer models for valuation, developed by him at Farrell.
 Mock Test 1 – CFA Level I

2. Raj Kumar, CFA is explaining an investment strategy to his HNI client, who he feels is
suitable for the strategy. He states, “the central election results of India will be out in two
days. Previously in 2009, the markets gave a thumbs-up to the clear mandate of the people
& hit the upper circuit breakers for the next two days. Prior to that, in 2004, on the election-
results day, market recorded its biggest fall because of the broken mandate & an indication
of hung Parliament. I would recommend you to invest heavily in the index call & put options
because the markets are bound to move up or down drastically. The windfall profits on one
position will easily cover the cost of other position & leave you with a huge profit.”
Raj has most likely:

A. not violated any standard because he is suggesting an acceptable strategy & has
backed his recommendation with adequate evidence.
B. violated the Standard V (B) – Communication with clients.
C. violated the Standard II (B) – Market Manipulation.

3. Which of the following statements is least accurate regarding the Global Investment
Performance Standards (GIPS)?

A. Firms claiming compliance with GIPS are mandatorily required to verify their claim
from an independent third party.
B. All fee-paying, discretionary portfolios must be included in at least one composite.
C. Only full compliance can be made on a firm-wide basis.

4. Julia Stephens, CFA been recently hired as a portfolio manager by Camas Capital. In order to
impress her new bosses, she contacts few old clients known to her through her former
employer. She gives them a detailed performance presentation of Camas.
Which of the following statements is most accurate?

A. Julia can solicit these clients only after notifying her previous employer.
B. Julia is prohibited from soliciting these clients by CFA Institute’s Standards of
Professional Conduct.
C. Julia is not prohibited from soliciting these clients as long as she is relying on her
memory & publicly available contact information.
 Mock Test 1 – CFA Level I

5. According to Standard III (A) – Loyalty, Prudence and Care, brokerage is an asset of the :
A. broking firm.
B. investment managing firm.
C. client.

6. Greg Murphy, CFA is suspicious of his colleague’s trading activities which he feels is illegal.
The colleague is a CFA Level III candidate. As per Standards of Professional Conduct, Murphy
should:

A. consult legal counsel to determine whether the activity is illegal.

B. file a complaint with CFA Institute regarding the conduct of his colleague.
C. demand an investigation by the supervisor.

7. Van Der Saar, CFA is a small-cap portfolio manager. He has decided to buy a sizeable
position of Derek Inc., a regional retail company for his client. Derek is a listed company but
its trading volume in the market is very low. Van is worried that his order will pump up the
liquidity causing the prices to soar which will result in a higher cost-price per share. Hence,
Van executes a series of block trades to reduce the price impact.
According to CFA Institute Standards of Professional Misconduct:

A. Van is in violation of Standard II (A) – Market Manipulation.

B. Van is in violation of Standard I (C) – Misrepresentation.
C. Van has not in violation of any Standard.

8. Zack Carter, CFA manages an endowment fund. The fund as a significant stake in Bell Inc.’s
common stock. Zack also holds small amount of common stock of Bell in his personal
portfolio.
Zack is invited to a selective analyst conference where CFO of Bell will interact with selected
analysts. The CFO admits of some financial irregularities in the company committed by
middle-level management but the investigation is not yet completed. The matter is being
dealt with by the company behind closed doors. CFO says that there will be a press release
by the company regarding this matter within 2 days.
According to CFA Institute Standards of Professional Conduct, at present Zack can:

A. sell Bell’s stock from the endowment’s portfolio but not from his personal portfolio.
B. not sell Bell’s stock either from endowment’s portfolio or from his personal
portfolio.
C. sell Bell’s stock from the endowment’s portfolio & subsequently from his portfolio.
 Mock Test 1 – CFA Level I

9. Craig Yorker, CFA is analysing Rocky Inc., a cement – manufacturing company.

On an official visit to the company’s plant, Craig notices the reduced number of trucks going
out of the factory. On his earlier visits, there would be long queues of trucks carrying
cement bags, waiting to move out of the factory.
After returning from the plant, Craig speaks to the suppliers of Rocky & they state that
Rocky has reduced the purchase orders for the materials. He also reads an article in a
business magazine that the demand in the construction & infrastructure sector has slowed
down.
Craig concludes a slowdown in the construction & infrastructure has begun to hit cement
industry & Rocky has responded this by reducing the production.
Anticipating that this will cause the the stock price of Rocky to fall, Craig issues a Sell
recommendation for Rocky.
Craig has

A. not violated any Standards.

B. violated Standard II (A) –Material Non-public information.
C. violated Standard V (A) – Diligence & Reasonable Basis.

10. Sarah Fowler, CFA has been hired by Jensen Inc., to manage its pension fund. Sarah’s
fiduciary duty is owed to:

A. shareholders of Jensen.
B. management of Jensen.
C. pension plan participants & beneficiaries.

11. Kate Park, CFA is an equity research analyst with an asset management firm. She has
researched on the common stock of Lite Inc. & has decided to change her recommendation
from a buy to sell.
She mails this change in recommendation to all her clients. Next day a client calls her &
places a buy order for 1000 shares of Lite.
Kate should:

A. accept the order without any protest.

B. advise the customer of change in recommendation before accepting the order.
C. refuse to accept the order under any circumstances.
 Mock Test 1 – CFA Level I

12. Samuel Elliot, CFA is working as an independent equity advisor for the last 5 years. He has
recently developed a spread-sheet model based on historical data of last 5 years to select
growth stocks. He back-tested the model by incorporating the data of the last 10 years. The
model displayed 70% accuracy in selecting growth stocks which outperformed the S&P 500
index over the last 10 years.
He decides to use the results in his promotional material. The advertisement states that
Samuel has consistently outperformed the S&P 500 with the help of self-generated
computer software which has high level of accuracy in selecting outperforming growth
stocks.
Samuel has most likely:

A. violated Standard III (D) – Performance presentation.

B. violated Standard III (B) – Fair Dealing.
C. not violated any Standard because the advertisement states the results of the
computer-model.

13. According to Standard III (D) – Performance Presentation, it is:

A. recommended to exclude the terminated accounts as part of historical performance.

B. recommended to present a minimum 5-year performance history.
C. permissible to leave out details in a presentation.

14. Graham Fleming, CFA is the personal wealth advisor of Warren Bush, President of London
Football Club. Warren, in an informal conversation with Graham’s assistant Hugh Damon,
CFA states that he has been suffering from cancer & will tender his resignation from the
President’s post. The assistant passes this information to Graham.
Hugh has most likely:

A. A: Standard III (E) – Preservation of Confidentiality.

B. B: Standard III (A) – Loyalty, Prudence & Care by prioritizing employer’s interest
before client’s interest.
C. C: not violated any Standard.

15. Paulo Anceloti is employed with Hampton Financial Advisors. He passed the CFA Level II
exam two years ago. But owing to his busy work schedule, he has not appeared for the
Level III exam. He thinks it would be wastage of money to register for the exam & then
appear it without adequate preparations. But he continuously updates his knowledge by
attending the seminars of local CFA societies. He is planning to get himself registered for the
 Mock Test 1 – CFA Level I

next year’s exam & then take a 3-month leave prior to exam. He uses the designation of CFA
Level III candidate on his business cards.
Paulo has most likely:

A. A: not violated any Standard.

B. B: violated Standard VII (B) – Reference to the CFA Institute, the CFA Designation &
the CFA Program.
C. C: violated Standard VII (A) – Conduct as a CFA Institute Member or CFA Candidate.

16. Ed Heart was very nervous before the CFA Level II exam. His demanding work schedule did
not allow him to study properly for the exam. He noted down few formulae on a piece of
paper & hid it under his socks.
After entering the examination room, he does not risk pulling the paper out of his socks due
to the intense vigilance of the exam proctors. But he managed to glance the answer sheet
of the person sitting ahead of him.
Ed has most likely:

A. violated Standard VII (A) – Conduct as Members & Candidates in the CFA Program
for taking notes into the examination room & for glancing the answer sheet of
another person.
B. not violated any standard because he did not refer the notes during the exam &
glancing was accidental.
C. Violated Standard VII (A) – Conduct as Members & Candidates in the CFA Program
for glancing the answer sheet of another person but not for taking notes into the
examination room since he did not refer the notes eventually.

17. Which of the following is not an objective of GIPS?

A. To promote global “self-regulation.”

B. To obtain global acceptance of calculation & presentation standards in a fair,
comparable format with full disclosure.
C. To obtain world-wide recognition by securities regulators.
 Mock Test 1 – CFA Level I

18. Alfred Cook, CFA is a citizen of Zambia but resides in South Africa.
It is not illegal to trade on material non-public information in Zambia.
In South Africa, it is permissible to allocate some portion of over-subscribed IPO to your
own account before allocating it to your clients.
Which of the following statement is most accurate?

A. Alfred can trade on material non-public information in Zambia & he can allocate
some portion of over-subscribed IPO to his own account before allocating it to his
clients in South Africa.
B. Alfred can allocate some portion of over-subscribed IPO to his own account before
allocating it to his clients in South Africa but he cannot trade on material non-public
information in Zambia.
C. Alfred can neither trade on material non-public information in Zambia & nor can he
allocate some portion of over-subscribed IPO to his own account before allocating it
to his clients in South Africa.

QUANTITATIVE METHODS

19. Following is the table about citizens of a town based on whether they are males or females
& whether they are married or single. The probability of being either a female or a single
person is closest to:
Married Single Total
Male 200,000 425,000 625,000
Female 200,000 375,000 575,000
Total 400,000 800,000 1,200,000

A. 32%
B. 73%
C. 83%

20. Albert purchased 1 share each of 60% of the companies in the S&P 500 index, while Pinto
purchased 1 share each of the remaining 40%. 25% of John’s shares are of companies based
in New York, while 20% of Pinto’s shares are of companies based in New York. If a randomly
selected share is of a company based in New York, what is the probability Albert selected it?

A. 60%
B. 65%
C. 15%
 Mock Test 1 – CFA Level I

21. An investor is considering investing in infrastructure sector of the stock index. He wants to
invest in 6 stocks from the sector which comprises of 20 stocks. How many 6-stock
infrastructure portfolios can be made if the order in which he buys the stock is not
important?

A. 542,640
B. 38,760
C. 42,530

22. Tracking error is defined as

A. Population mean minus Sample mean

A. Standard deviation of differences between portfolio return & benchmark return
B. Portfolio return minus Benchmark return.

23. A company is considering taking up a new project. The average NPV of the project is
$250,000 & standard deviation of NPV is $200,000. What is the probability that the IRR of
the project will be greater than the discounting rate used to discount the cash flows?

A. 89.44%
B. 80.00%
C. 55.55%

24. Which of the following statements regarding Monte Carlo simulation is least accurate?

A. It is very complex.
B. The results are no better than the assumptions.
C. It is a very analytical method.

25. The average return of S&P 500 is 11.4% & the standard deviation of returns is 15.5%. If
returns are approximately normal, 95% confidence interval for the index next year is closest
to?

A. -14% to 37%
B. -19% to 42%
C. -29% to 51%
 Mock Test 1 – CFA Level I

26. Portfolio X has an average return of 10.5% & a standard deviation of 12%.
Portfolio Y has an average return of 15.8% & a standard deviation of 17%.
Portfolio Z has an average return of 8% & a standard deviation of 9%.

The investor wants to select a portfolio which will minimize the probability of losing money.
Which portfolio should investor select?

A. Portfolio X
B. Portfolio Y
C. Portfolio Z

27. A larger sample size most likely improves the estimator’s :

A. Consistency
B. Efficiency
C. Unbiasedness

28. Which of the following statements regarding Central Limit Theorem is least accurate?

A. Population Mean = Mean of the distribution of all possible sample means.

B. Standard Error of sample mean = Sample standard deviation divided by the sample
size.
C. As sample size increases, the sampling distribution approaches normal distribution.

29. A value of 1.2 in the short-term Trading Index most likely indicates that:

A. The majority of trading volume is in declining stocks.

B. Market is undervalued.
C. Investors are bullish.

30. Charles Harper, CFA is analysing the markets of developing countries. In order to test if
Indian stock market is more volatile than Chinese stock market, he observes the levels of
their market indices to a construct a sample of the two indices. The appropriate test
statistic to carry out the test is:
A. T-test.
B. Chi-square test.
C. F-test.
 Mock Test 1 – CFA Level I

31. When sampling from a non-normal distribution with known variance, which statistic should
be used if the sample size is large & if the respective sample size is small?

A. z-statistic; t-statistic
A. z-statistic; not available
B. t-statistic; z-statistic

32. A type II error is

A. rejecting a true alternative hypothesis.

B. failing to reject a false null hypothesis.
C. rejecting a true null hypothesis.

ECONOMICS

33. Suppose two countries A and B have the following cost of production for two goods:

Country Product X Product Y

A 130 140
B 100 90
Now, based on the given information, which of the following is most accurate?

A. Since, country B has absolute advantage in production of both the products, it would
not benefit from trade with A.
B. Since, country A has a comparative advantage in the production of X, it would export X
to country B.
C. Since, country B has a comparative advantage in the production of X, it would export X
to country A.

34. The money supply curve on a graph with interest rate on the Y-axis & quantity of real
money on the X-axis, is :

A. Upward sloping to the right.

B. Vertical.
C. Downward sloping to the right.
 Mock Test 1 – CFA Level I

35. Which of the following situation will decrease the aggregate demand of a country?

A. The country’s currency appreciates relative to other currencies.

B. An increase in expected inflation in the country.
C. An increase in expected income.

36. When potential real GDP is less than actual real GDP, the economy is facing

A. Inflation.
B. Recession.
C. Unemployment.

37. Which school of economic thought believed that shifts in aggregate demand due to changes
in expectations are the primary cause of business cycles?

A. A: Classical.
B. B: Keynesian.
C. C: Monetarist.

38. When the economy is operating at less than full capacity,

A. Frictional Unemployment is present.

B. Structural Unemployment is present.
C. Cyclical Unemployment is present.

39. If a country depreciates its home currency with respect to US dollars, what is the most
likely immediate impact on the net exports?
A. Net exports would increase
B. Net exports would decrease
C. Net exports would not change
 Mock Test 1 – CFA Level I

40. Given the market share of the leading firms in the textile industry of US, compute the 4 firm
concentration ratio and the 3 firm HHI.

Firms in textile industry in US Market Share (in %)

Alpha 13%
Beta 23%
Charlie 10%
Delta 32%
Eric 22%
Concentration ratio HHI

A. 46% 0.326
B. 33.3% 141.3
C. 65% 0.2306

41. Velocity of money is defined as

A. GDP divided by the price level.

B. Money supply multiplied by price level.
C. GDP divided by the money supply.

42. Change in quantity of money is primarily determined by

A. Change in monetary base & the money multiplier

B. Change in monetary base & the required reserve ratio.
C. The required reserve ratio & the money multiplier.

43. Which of the following set of actions by the government will result in maximum increase of
the aggregate demand?

A. Reduction in government spending & equal increase in tax rates.

B. Increase in government spending & equal increase in tax rates.
C. Reduction in government spending & equal reduction in tax rates.

44. Which one of the following is most likely to lose if there is an unanticipated increase in
inflation in the economy?

A. A person who has taken a fixed rate, 30-year housing loan.

B. A person who has substantially invested in floating rate notes.
C. A large bank which has a substantial part of its loan portfolio in fixed-rate auto loans.
 Mock Test 1 – CFA Level I

FINANCIAL REPORTING & ANALYSIS

45. Following is the information related to machinery owned by Chelsea Inc.:

Original Cost $750,000

Accumulated Depreciation to date $125,000
Value in use $600,000
Fair value $615,000
Selling costs $10,000

What is the amount of impairment loss under IFRS?

A. $20,000
B. $25,000
C. $10,000

46. Which of the following statement about intangible asset is least accurate?

A. Estimating useful lives of intangible assets is complicated because of legal,

regulatory, contractual & economic factor.
B. An intangible asset having a specific expiration period which can be renewed at a
minimal cost is amortized annually.
C. Goodwill is tested for impairment at least annually.
.
47. For analytical purposes, if a deferred tax liability is expected not to reverse, it should be

A. considered as a liability.
B. ignored.
C. added to equity.

48. Arsenal Inc. has machinery with a tax base of $1.2 million & a carrying value of $1 million.
Arsenal also has a tax-loss carry forward of $0.8 million which will certainly be utilized after
two years.
The current tax rate applicable to Arsenal is 30% which is expected to decrease to 25%.
What is the net effect of the change in tax rate on the income statement?

A. Increase in deferred tax expense by $50,000.

 Mock Test 1 – CFA Level I

B. Increase in deferred tax expense by $250,000.

C. Decrease in deferred tax expense by $50,000.

49. Select the best alternative which describes the effect of a valuation allowance. A valuation
allowance :

A. increases income, reduces assets & equity.

B. reduces income, assets & equity.
C. reduces income, increases liability & increases equity.

50. Liverpool Inc. has issued 8%, $2.5 million bonds at par with issuance costs of $100,000. If
Liverpool is preparing its financial statements under US GAAP, what will be the effects of
this issue on the financial statements of Liverpool Inc.?

A. Increase assets & liabilities by $2.5 million respectively.

B. Increase assets by $2.4 million, liabilities by $2.5 million & expenses by $0.1 million.
C. Increase assets & liabilities by $2.4 million respectively.

51. Which of the following statements is least accurate?

A. Operating Income (EBIT) will be higher for companies that use finance lease relative
to companies that use operating lease.
B. Total Expense over the term of the lease will be the same regardless of the
treatment of lease as operating or financial.
C. Net Income will be lower in the earlier years of lease term, for companies that use
operating lease as compared to companies using financial lease.

52. Totten ham Inc. issued $2,000,000 face-value 2-year zero coupon bonds on 31st December
2010 to yield 10%. In 2011, Totten ham recorded an interest expense of $165,289. In 2012,
Totten ham recorded an interest expense of $181,818 & redeemed the bonds in full
amount. On the basis of these transactions only, Totten ham’s cash flow statement would
show Cash Flow from Operations of:

A. -$165,289 in 2011 & -$181,818 in 2012.

B. -$347,107 in 2012.
C. zero in both years.
 Mock Test 1 – CFA Level I

53. Loss arising due to changes in assumptions about the retirement ages or the rate of salary
growth with respect to the pension expense is known as :

A. Service cost.
B. Prior service cost.
C. Actuarial Loss.

54. In a defined-benefit plan, the investment risk is borne by the

A. Employees
B. Employer
C. Trustee

55. Which one of the following is least likely a criterion under US GAAP for classifying a lease as
a finance lease?

A. The lessee has an option to purchase the asset for its fair value at the termination of
the lease.
B. The present value of the minimum lease payments is 90% or more of the fair value
of the leased asset.
C. The lease term is 75% or more of the estimated life of the leased asset.

56. Bradford Inc. and Watford Inc. are completely identical except that Bradford uses finance
leases & Watford uses operating leases. Bradford’s debt-to-equity ratio & current ratio
relative to Watford would be:

Debt-to-equity ratio Current Ratio

A. Higher Lower
B. Higher Same
C. Same Same

57. Consider the following statements:

Statement 1: Unrealized gains on Available-for-Sale Securities are recognized in Income

Statement.

Statement 2: Unrealized gains on Held-to-Maturity Securities are reported as other

comprehensive income forming part of shareholders’ equity.
 Mock Test 1 – CFA Level I

Select the best alternative regarding the correctness of the above two statements.

A. Both the statements are correct.

B. Both the statements are incorrect.
C. Only one statement is correct.

58. Duckworth Inc. follows LIFO method. Following is the data regarding its inventory & COGS:

Inventory as on 31st December 2011 $245,000

COGS for the year 2011 $732,000
LIFO Reserve as on 31st December 2010 $82,000
LIFO Reserve as on 31st December 2011 $103,000

Calculate the inventory as on 31st December 2011 & COGS for the year 2011 under FIFO
method.

Inventory COGS
A. $142,000 $753,000
B. $348,000 $835,000
C. $348,000 $711,000

59. Which of the following statement regarding treatment of extra-ordinary items is most
accurate?

A. US GAAP does not permit firms to treat items as extraordinary.

B. Under IFRS, extraordinary items are reported in the income statement, net of tax,
below income from continuing operations.
C. IFRS does not permit firms to treat items as extraordinary.

60. Portsmouth Inc. received interest of $60,000 on tax-exempt government bonds. The tax
rate applicable to Portsmouth is 30%.
What is the effect of this difference between taxable income & pre-tax income?

A. Increase in deferred tax liability by $18,000.

B. Increase in deferred tax asset by $18,000.
C. Decrease in effective tax rate below 30%.
 Mock Test 1 – CFA Level I

61. Everton Inc. has 2,500,000 common shares outstanding. There are 200,000 warrants
outstanding to purchase the stock at $50 & there are 150,000 stock options outstanding to
purchase the stock at $70. The average market price of the stock over the year was $60 &
the current market price is $80.
What is the number of shares used to calculate the diluted EPS?

A. 2,533,333
B. 2,593,750
C. 2,508,333

62. The management of Golden Textile Inc. is negotiating terms of a new contract with its
labour union. Which of the following would least likely indicate a manipulation by the
management to improve its bargaining position?

A. Expensing items which should be capitalized.

B. Increasing the provision for doubtful debts without concrete evidence to support it.
C. Increasing the discount rate in calculation of defined benefit obligation.

63. Burke Inc. is in the alkaline chemical industry, which has an average receivables turnover
ratio of 22 times. If Burke’s receivables turnover is more than that of the industry, Burke’s
average collection period is most likely

A. 20 days
B. 14 days
C. 18 days

64. Aston Inc. &Fulham Inc. are companies on an expansion spree. They are identical in all
aspects except that Aston Inc. capitalizes some costs that Fulham Inc. expenses. As
compared to Aston, Fulham will most likely show

A. lower investing cash flow.

B. more volatile return on equity.
C. lower debt-to-equity ratio.
 Mock Test 1 – CFA Level I

65. Bolton Inc. shows dividends paid & interest received under cash flow from operations. This
treatment is acceptable under

A. IFRS but not US GAAP.

B. both IFRS & US GAAP.
C. US GAAP but not IFRS.

66. Following is the extract of Balance Sheet of Stokes Inc.

2010 2011
Prepaid Rent as on 31st $60,000 $45,000
December
Wages Payable as on 31st $36,000 $48,000
December
Rent paid during the year $240,000 $260,000
Wages paid during the year $180,000 $195,000

Calculate Stokes’ rent & wages expense for the year ended 31st December, 2011.

Rent Expense Wage Expense

A: $245,000 $168,000
B: $275,000 $207,000
C: $215,000 $147,000

67. The ratio of operating cash flow to net income would least likely be an accounting red flag
when it is:

A. highly variable
B. less than one
C. declining over time.

68. Wigan Inc. has a long-term ‘take or pay’ commitment with its supplier. For analytical
purposes, an analyst should
A. add the present value of the minimum future commitment to the company’s
liabilities only.
B. subtract the present value of the minimum future commitment to the company’s
assets only.
C. add the present value of the minimum future commitment to the assets & liabilities
of the company.
 Mock Test 1 – CFA Level I

CORPORATE FINANCE

69. Which of the following is a good corporate governance practice?

A. The Company’s bye-laws require compulsory attendance at the annual meeting to

vote.
B. The chairman of the Board is the former CEO of the firm.
C. Board is empowered to hire external consultants without the approval of
management.

70. Consider the following basic principles of capital budgeting.

a.) Capital budgeting decision is based on the after-tax net profit of the project.
b.) The interest cost specific to a project should be ignored while estimating the cash
flows.
Which statements do you agree with?

A. Statement (a) but not Statement (b)

B. Statement (b) but not Statement (a)
C. Neither (a) nor (b)

71. Which of the following types of companies are most likely to use pay-back period method to
evaluate projects?

A. Large companies in Asia

B. Public companies in USA
C. Private companies in Europe.

72. Following are the cash flows of a project.

Year 0 - $750,000
Year 1 $200,000
Year 2 $225,000
Year 3 $250,000
Year 4 $300,000
Year 5 $400,000

The required return is 13%. Calculate the project’s discounted pay-back period.
 Mock Test 1 – CFA Level I

A. 4.04 years
B. 4.18 years
C. 4.82 years

73. What will be the effect on WACC of a company having equal amounts of equity & debt, if
the corporate tax of the company increases?

A. Increase
B. Decrease
C. Insufficient information to ascertain

74. Elite Inc. has 8%, $1million bond outstanding (annual coupon).The par value of one bond is
$100 & the bonds will mature in 5 years. The bonds are trading at $98.5 in the open market.
Elite’s marginal tax rate is 30%. Using bond-yield plus method, calculate Elite’s cost of
equity assuming a risk premium of 5%

A. 13.38%
B. 10.87%
C. 10.60%

75. Super-strong Inc. is a manufacturer of drinking soda. Super-strong is now considering to

launch its own whiskey brand. It pays $80,000 to a consultancy firm for market research.
The research indicates a favorable market potential for whiskey & an increase in the sale of
its soda water by 10% if the whiskey brand is launched.
While evaluating the whiskey project, Super-strong should:

A. include the cost of market research but ignore the effect on soda sales.
B. exclude the cost of market research but consider the effect on soda sales.
C. include the cost of market research & the effect on soda sales.

76. Jefferson Inc. is planning to start a new project in its defunct textile mill. However there is
divergence of opinion in the management regarding the project. Some executives are of the
opinion that that the defunct mill should be sold instead of starting a project. However in-
house research was conducted for the feasibility of the project & it produced the following
estimates:
The project would require an outlay of $600,000, the amount being paid one year from
now. Thereafter, the project will generate cash inflows of $250,000 annually over
 Mock Test 1 – CFA Level I

subsequent 8 years. It will then cost $200,000 to shut the project over the following
year. Assume all cash flows occur at the end of the year.
What should the minimum price be set for the mill if the company decides against the
commencement of project? The required rate of return is 15%

A. $404,329
B. $464,978
C. $396,913

77. The Board of New Age Inc. is planning to consider repurchasing (buy-back) $1,000,000
worth of common stock. The Board is planning to repurchase the shares at the prevailing
market price. After much deliberation, the Board has decided to borrow the funds for the
repurchase. Following is the information regarding the buy-back:
Prevailing price = $25
Number of shares outstanding before buy-back = 1,040,000
EPS prior to buy-back = $1.5 per share
After-tax cost of borrowing = 6%

What will be the EPS of New Age after the proposed buy-back?

A. $1.75
B. $1.25
C. $1.50

78. Project sequencing is known as

A. investing in a project today to create investment opportunities in other projects in

the future.
B. allocating funds to obtain the maximum value for the investors, given limitations of
capital.
C. Taking up the project with the shortest pay-back period first & subsequently
projects with higher pay-back period.

EQUITY INVESTMENTS

79. Karthik, CFA wants to compare other Asian equity funds with Indian stock indices. He selects
a sample of funds that have minimum 10-year performance history. On the basis of the
returns of these funds, Karthik reaches a conclusion that other Asian equity funds have
 Mock Test 1 – CFA Level I

consistently outperformed the Indian stock indices over the 10-year period. The results of
Karthik’s test are most likely subject to :
A. Sample selection bias
B. Survivorship bias
C. Small sample bias

80. Top-down approach to security valuation begins with analysis of:

A. Company’s financials
B. Industry’s prospects
C. Economy’s projected performance

81. Holding other things constant, a company’s earnings multiplier would increase if

A. Retention Ratio decreases

B. Required rate of return increases
C. Dividend growth rate decreases

82. The average EV/EBITDA for American 5-star hotel industry is 8.

Following is the data for East American 5-star hotel:
(in $ millions)
EBITDA 12
Market Value of Debt 18
Cash 2
Book Value of equity 60

What is the equity value of East American Hotel based on average EV multiple?

A. $76 million
B. $78 million
C. $80 million

83. The yield on a company’s 8% preferred stock with par value of $75 is 10%. What is the
intrinsic value of preferred stock?

A. $93.75
B. $60.00
C. $73.50
 Mock Test 1 – CFA Level I

84. Following is the data for Emily Inc.:

Dividend Pay-out Ratio = 40%
Net Profit = $120,000
Book Value of Equity = $800,000
Next year’s EPS = $3.5
Cost of Equity = 15%

Calculate the price of a share of Emily Inc. using constant growth, dividend discount
model.

A. $15.56
B. $23.33
C. $35.00

85. Which form of Efficient Market Hypothesis implies that abnormal returns can be earned on
an average by using technical analysis?

A. Weak Form
B. Semi-strong
C. None

86. Which of the following industries are least likely cyclical?

A. Personal Care
B. Hotels and Restaurants
C. Apparel

87. Which of the following index will exhibit a downward bias in the event of stock splits by the
companies in the index?

A. Value-weighted index
B. Price-weighted index
C. Equal-weighted index
 Mock Test 1 – CFA Level I

88. Which of the following is an assumption behind efficient capital markets?

A. Market participants correctly adjust prices to reflect new information.

B. Return expectations are independent of risk.
C. News announcements are independent of each other with respect to their timing.

89. Which class of shareholders has a priority in receiving their stipulated dividends, if in
arrears, before any dividends are paid to common equity shareholders?

A. Cumulative Preference Shareholders

B. Convertible Preference Shareholders
C. Participating Preference Shareholders

90. Which of the following statements is least accurate?

A. Returns of defensive stocks have high correlation with returns of the market.
B. Cyclical companies often have high business or financial risk.
C. Value stocks are often characterized by low P/E ratios.

DERIVATIVES

91. Which of the following pair of statements about call & put options at expiration is most
accurate?

CALL PUT
A: The maximum loss to the buyer is The maximum gain to the buyer is
premium. unlimited.
The maximum gain to the buyer is The maximum loss to the writer
B:
unlimited. is(exercise price – premium)
The maximum loss to the writer is The maximum gain to the writer is
C: (exercise price – premium) premium.

92. The current market price of a stock is $28. The price of 3-month put option with an exercise
price of $25 on that stock is $1.25. Calculate the price of 3-month call option with an
exercise price of $25 on that stock. The risk-free rate is 5%.
A. $2.05
B. $4.55
C. $3.91
 Mock Test 1 – CFA Level I

93. Shin & Chan are discussing various factors which affect the option values.
Shin says an increase in risk-free rate of interest decreases the price of call & put option. He
adds that increase in exercise price increases the price of put option but reduces the price
of call option.
Chan argues that increase in risk-free rate of interest increases the price of call option but
decreases the price of put option. He also adds that increase in volatility of the underlying
asset decreases the price of call & put option.
Do you agree with them?

A. Agree with Shin but disagree with Chan.

B. Disagree with Shin but agree with Chan.
C. Disagree with both.

94. Which of the following are the characteristics of currency swap?

A. Notional Principal is not swapped at initiation & termination; Interest payments are
netted at each settlement dates.
B. Notional Principal is swapped at initiation & termination; Interest payments are
netted at each settlement dates.
C. Notional Principal is swapped at initiation & termination; Full interest payments are
exchanged at each settlement date.

95. A bank has entered a $1 million, 2-year semi-annual plain-vanilla interest-rate swap as the
fixed rate payer. The fixed rate is 5% & the floating rate is 180-day LIBOR + 100 basis points.
Current LIBOR is 3.5%. Following is the data regarding 180-day LIBOR.
After 6 months: 3.8%
After 12 months: 4.2%
After 18 months: 4.4%
After 24 months: 4.5%

On the day of swap termination the bank will receive which of the following:

A. $2500
B. $4000
C. $2000
 Mock Test 1 – CFA Level I

96. You purchase a share for $50 & simultaneously write a call on it with an exercise price for
$55 for a premium $6. What is the maximum profit you can earn if you hold the position till
expiration?
A. Unlimited
B. $11
C. $6

FIXED INCOME QUESTIONS

97. A coupon bond pays annual interest, has a par value of $1,000, matures in 4 years, has a
coupon rate of $100, and a yield to maturity of 12%. The current yield on this bond is:

A. 11.25%
B. 10.65%
C. 9.50%

98. Suppose that the six-month spot rate is equal to 7% and the two-year spot rate is 6%. The
one-and a half-year forward rate starting six months from now has to:

A. be less than 6%
B. lie between 6% and 7%
C. be more than 6%

99. A bond is trading at a premium if its:

A. yield is greater than its coupon rate

B. redemption value is greater than its face value
C. price is greater than its par value

100. Which of the following is least likely an example of external credit enhancement?

A. yield is greater than its coupon rate

B. redemption value is greater than its face value
C. price is greater than its par value

101. Which of the following bond covenants is considered negative?

A. Payment of taxes
B. No additional debt
C. Maintenance of collateral
 Mock Test 1 – CFA Level I

102. Consider a floating rate issue that has a coupon rate that is reset on January 1 of each
year. The coupon rate is defined as one-year London Interbank Offered Rate (LIBOR) + 125
basis points and the coupons are paid semi-annually. If the one-year LIBOR is 6.5% on
January 1, which of the following is the semi-annual coupon payment received by the
holder of the issue in that year?

A. 3.875%
B. 3.250%
C. 7.750%

103. A 20-year, $1,000 face value, 10% semi-annual coupon bond is selling for $875. The
bond's yield to maturity is:

A. 5.81%
B. 11.43%
C. 11.62%

104. Which of the following is a difference between an on-the-run and an off-the-run issue? An
on-the-run issue:

A. is the most recently issued security of that type

B. is publicly traded whereas an off-the-run issue is not
C. tends to sell at a lower price

105. An investor plans to buy a 10-year, $1,000 par value, 8% semiannual coupon bond. If the
yield to maturity of the bond is 9%, the bond’s value is:

A. $1,067.95.
B. $934.96.
C. $935.82.

106. Which of the following statements regarding zero-coupon bonds and spot interest rates is
correct?

A. If the yield to maturity on a 2-year zero coupon bond is 6%, then the 2-year spot
rate is 3%.
B. Spot interest rates will never vary across the term structure.
 Mock Test 1 – CFA Level I

C. Price appreciation creates all of the zero-coupon bond's return.

107. Which of the following statements with regard to floating rate notes that have caps and
floors is most accurate?

A. A floor is a disadvantage to both the issuer and the bondholder while a cap is an
advantage to both the issuer and the bondholder.
B. A cap is an advantage to the bondholder while a floor is an advantage to the
issuer.
C. A cap is a disadvantage to the bondholder while a floor is a disadvantage to the
issuer.

108. What is the value of a 10-year, semi-annual, 8% coupon bond with a $1,000 face value if
similar bonds are now yielding 10%?

A. $875.38.
B. $1,373.87.
C. $1,000.00.

Alternative Investment Questions

109. A bond is currently trading at $98.4. It is estimated that the price will fall to $96.9 if yield
rises 25 basis points & the price will increase to 100.2 if the yield falls 25 basis points.
Based on these estimates, the duration of the bond is

A. 3.87
B. 6.70
C. 13.40

110. Which of the following statements is least accurate?

A. Callable bonds exhibit negative convexity at lower yields.

B. Putable bonds exhibit less price volatility at higher yields.
C. The slope of the yield curve of a putable bond steepens at higher yields.

111. A PE fund is planning to invest $1,500,000 in a new project that will pay $8,000,000 at the
end of four years, if successful. The required rate of return is 20%. Following are
estimated probabilities of failure of the project over the next four years. Each year’s
 Mock Test 1 – CFA Level I

probability represents the probability of failure in that year, given the project survived till
that year.
Year Probability of failure
1 25%
2 25%
3 20%
4 20%

Calculate the NPV of the project

A. $969,136
B. $234,489
C. -$111,111

112. The main advantage of Fund of funds over a single hedge funds is

A. More Diversification
B. Higher Returns
C. Lower Management Fees

113. Which of the following company would seek mezzanine financing?

A. A company which has completed the development of product & is seeking funds
to translate it to commercial production
B. A company preparing for an IPO
C. A company that has started producing & selling goods is seeking funds for
further expansion.

114. Which of the following condition will result in a negative roll yield?

A. Backwardation
B. Future prices are higher than spot prices
C. Market is dominated by short hedgers.
 Mock Test 1 – CFA Level I

PORTFOLIO MANAGEMENT

115. You are required to construct a portfolio comprising the market portfolio & risk-free
asset. The expected return of your portfolio should be 15%. Risk-free rate is 5% & the
expected market return is 20%. Standard deviation of the returns of the market is 18%.
The standard deviation of the portfolio is closest to

A. 18%
B. 12%
C. cannot be determined with the information provided.

116. Following is the data for three potential investments.

Stock Current Market Price Estimated Estimated Beta

Market Price Dividend
ABC $45 $50 $0.625 1.50
LMN $16 $18 $0.40 1.30
XYZ $80 $82 $2 0.80

The expected return on the market is 10% & the risk-free rate is 5%. Which of the stock
will plot above Security Market Line (SML)?

A. XYZ
B. ABC
C. LMN

117. Which of the following is most likely to be considered as a constraint in preparing the
investment policy statement?

A. Return Objective
B. Risk Tolerance
C. Liquidity Requirements

118. What is the risk measure associated with the SML?

A. Beta of the Security

B. Standard Deviation of the Security
C. Standard Deviation of the Market
 Mock Test 1 – CFA Level I

119. Consider the following statements

(i) Market Risk can be decreased through diversification.

ii) The two types of risk are systematic risk & market risk.

iii) Company-specific risk can be decreased through diversification.

Choose the correct alternative.

A. Statements (i) & (ii) are correct

B. All the Statements are incorrect
C. Only Statement (iii) is correct

120. Beta is the measure of

A. Unsystematic Risk
B. Systematic Risk
C. Total Risk