CFA Level 1 Test Questions with Verified Answers (Graded A)

Allen Jabber invested $400 at the beginning of the last 12 months in the shares of a mutual fund that paid no dividends. Which Method will he correctly choose to calculate his average price per share from the monthly share prices? a) Arithmetic Mean b) Harmonic Mean c) Geometric Mean - Answer- Harmonic Mean - The harmonic mean of the 12 purchase prices will be his average price paid per share. Colonia has 2 political parties, the Wigs and the Wags. If the Wags are elected there is a 32% probability of a tax increase over the next 4 years. If the Wigs are elected there is a 60% probability of a tax increase. There is a 20% probability the that the Wags will be elected. The sum of the (unconditional) probability of a tax increase and the joint probability that the wigs will be elected and there will be no tax increase is closest to: a) 55% b) 70% c) 85% - Answer- 86.4% = C The unconditional probability of a tax increase is: 0.2(0.32) + 0.8(0.6) = 54.4%. The joint probability that the Wigs will be elected and there will be no tax increase is: 0.8(0.4) = 32%. The sum is: 54.4 + 32 = 86.4%. An analyst who wants to display the relationship between two variables graphically is most likely to use: a) a histogram b) a scatterplot c) a frequency polygon - Answer- B = Scatterplot Scatterplots illustrate the relationship between two variables. Histograms and frequency polygons show the distribution of observations for a single variable. Ralph will retire 15 years from today and has saved $121,000 in his investment account for retirement. He believes he will need 37,000 at the beginning of each year for 25 Years of retirement, with the first withdrawal on the day he retires. Ralph assumes his account will earn 8%. The amount he needs to deposit at the beginning of this year and each of the following 14 Years (15 in all) is closest to: a) 1350 b) 1450 c) 1550 - Answer- B = 1450 Step 1: Calculate the amount needed at retirement at t = 15, with your calculator in BGN mode. N = 25, FV = 0, I/Y = 8, PMT = 37,000, CPT PV = -426,564 Step 2: Calculate the required deposits at t = 0,1,....,14 to result in a time 15 value of 426,564, with your calculator still in BGN mode. PV = -121,000, N = 15, I/Y = 8, FV = 426,564, CPT PMT = -$1,457.21 The current price of Bosto shares is $50. Over the coming year, there is a 40% probability that share returns will be 10%, 40% probability returns will be 12.5%, and a 20% probability share returns will be 30%. Bostos expected return and standard deviation of returns for the coming year are closest to: a) E(R) = 15% Standard Dev = 7.58% b) E(R) = 17.5% Standard Dev = 5.75% a) E(R) = 17.5% Standard Dev = 7.58% - Answer- A E[R] = (0.4)(10) + (0.4)(12.5) + (0.2)(30) = 15% Variance = (0.4)(10 − 15)2 + (0.4)(12.5 − 15)2 + (0.2)(30 − 15)2 = 57.5 Standard deviation=√57.5=7.58% Nikki Ali and Donald Ankard borrowed $15,000 to finance their wedding and reception. The fully amortizing loan at 11% requires equal payments at the end of each of the next seven years. The principle portion of the first payment is closest to: A) 1500 B) 1530 C) 1560 - Answer- B The interest portion of the first payment is simply principal × interest rate = (15,000 × 0.11) = 1,650. Using a financial calculator: PV = 15,000, FV = 0, I/Y = 11, N = 7, CPT PMT= $3,183 Principal = payment − interest = 3,183 − 1,650 = 1,533 Which of the following statements about probability distributions is least accurate? A) Continuous uniform distributions have cumulative distribution functions that are straight lines from 0 to 1. B) The probability that a continuously distributed random variable will take on a specific value is always 0. C) A normally distributed random variable divided by its standard deviation will follow a standard normal probability distribution. - Answer- C A standard normal probability distribution has a mean of zero, so subtracting the mean from a normal random variable before dividing by its standard deviation is necessary to produce a standard normal probability distribution. An analyst wants to construct a hypothesis test to determine whether the mean weekly return on a stock is positive. The null hypothesis for this test should be that the mean return is: A) Greater than zero B) Less than or equal to 0 C) Greater than or equal to 0 - Answer- B = Less than or equal to 0. Null hypothesis = condition if rejected would lend evidence to true alternative hypothesis. Alternative = Mean is Greater than 0. Null = Less than or = 0. X, Y, and Z are independently distributed random variables. The probability of X is 30%, the probability of Y is 40%, and the probability of Z is 20%. Which is closest to the probability that X or Y will occur? A) 70% B) 58% C) 12% - Answer- B = 58% The probability of X or Y is P(X) + P(Y) − P(XY). 0.3 + 0.4 − (0.3)(0.4) = 58% An analyst should use a t-test with n-1 degrees of freedom to test a null hypothesis that two variables have: A) equal means B) equal variances c) no linear relationship - Answer- A = Equal Means Differences in Means = T-Tests (N-1) Tests of Correlation = T-Tests (N-2) Tests for equality of variances = F-Tests The percentage changes in annual earnings for a company are approximately normally distributed with a mean of 5% and a standard deviation of 12%. The probability that the average change in earnings over the 5 years will be greater than 15.5% is closest to: A) 2.5% B) 5.0% C) 10% - Answer- A = 2.5% The standard error of a 5-year average of earnings changes is 12%√5=5.366.% 15.5% is 15.5−5/5.366=1.96 standard errors above the mean The probability of a 5-year average more than 1.96 standard errors above the mean is 2.5% for a normal distribution. Which of the following is least likely correct concerning a random variable that is lognormally distributed? A) It has a symmetric distribution. B) The natural logarithms of the random variable are normally distributed. c) It is a univariate distribution. - Answer- A = It has a symmetric distribution (false) A lognormal distribution is skewed to the right (positively skewed) An analyst is evaluating the degree of competition in an industry and compiles the following information: - Few Significant barriers to entry - Firms in the industry produce slightly differentiated products - Each firm faces a demand curve that is largely unaffected by the actions of other individual firms in the industry. This should be characterized as: A) Oligopoly B) Monopoly C) Monopolistic Competition - Answer- C = Monopolistic Competition Few Barriers to Entry + Little Interdependence among firms = Monopolistic Competition Which of the following statements about the behavior of firms in a perfectly competitive market is least accurate? A) A firm experiencing economic losses in the short run will continue to operate if its marginal revenues are greater than its variable costs. B) A firm that is producing less than the quantity for which marginal cost equals market price would lose money by increasing production C) If firms are earning economic profits in the short run, new firms will enter the market and reduce economic profits to zero in the long run. - Answer- B A firm that is producing MORE than the quantity where it's marginal revenue (market price in perfect comp) is equal to its marginal cost is losing money on sales of additional units. A firm producing where marginal cost is less than price is foregoing additional profit by not increasing production. The other responses accurately describe characteristics of perfectly competitive markets. Compared to a customs union or a common market, the primary advantage of an economic union is that: A) It's members adopt a common currency. B) It's members have a common economic policy. C) It removes barriers to imports and exports among its members. - Answer- The advantage of an economic union is that its members establish common economic policies and institutions. A common currency is a characteristic of a monetary union. All regional trading agreements remove barriers to imports and exports among their members. A Country's balance of payments accounts show the following: - A net inflow of capital transfers. - Greater sales than purchases of non financial assets. - Greater foreign owned assets in the country than government owned assets abroad. The country is most accurately described as having: A) Capital account deficit. B) Current account deficit. C) a financial account deficit. - Answer- B = A current account deficit. The components listed indicate the the capital and financial accounts are in surplus. This indicates that the current account must be in deficit. Other things equal, an increase of 2.0% in the price of Product X results in a 1.4% increase in the quantity demanded of Product Y and a 0.7% decrease in the quantity demanded of Product Z. Which statement about products X, Y, and Z is least accurate? A) Products X and Y are substitutes. B) Products X and Z are complements. C) Products Y and Z are complements. - Answer- C - Products Y and Z are complements (False). It does not necessarily follow from the information given in the question that products Y and Z are complements. The increase in the price of Product X caused the quantity demanded of Product Y to increase (positive cross-price elasticity) and caused the quantity demanded of Product Z to decrease (negative cross-price elasticity). This suggests that Product Y is a substitute for Product X, and Product Z is a complement to Product X. But this does not mean Product Y is a complement to Product Z. For example, gasoline is a complement to automobiles; bicycles are a substitute for automobiles; but gasoline is not a complement to bicycles. The EUR/USD spot exchange rate is 0.70145, and one-year interest rates are 3% in EUR and 2% in USD. The forward USD/EUR exchange rate is closest to: A) 1.1426 B) 1.4118 C) 1.4396 - Answer- B = 1.4118 EUR/USD x EUR 1Y IR / US 1Y IR = .7083 -- 1/.7083 = 1.4118 Depreciation of a country's currency is most likely to narrow its trade deficit when: A) Its imports are greater in value than its exports. B) Price Elasticity of import demand is greater than one. C) Investment increases relative to private and government savings. - Answer- B = Price elasticity of import demand is greater than one. The more elastic import demand and export demand are, the more likely currency depreciation is to narrow a trade deficit. A country with a trade deficit imports more than it exports. An increase in investment relative to saving would tend to increase the trade deficit. (Net Exports = Private and Gov Savings - Investment) According to real business cycle theory, business cycles result from: A) Rational responses to external shocks. B) Inappropriate changes in monetary policy. C) Increases and Decreases in business confidence. - Answer- A = Rational responses to external shocks Real Business Cycle = Cycles driven by individuals maximizing utility and changes in economic factors such as Technology. Keynesian Cycle = Changes in business confidence. Monetarist = Inappropriate changes in money supply growth. A decrease in the target US Federal Funds Rate is least likely to result in: A) a proportionate decrease in long-term interest rates B) an increase in consumer spending on durable goods. C) depreciation of the US dollar on the foreign exchange market. - Answer- A = a proportionate decrease in long term interest rates. Changes unlikely to be proportionate. LTR = STR + Anticipated Inflation