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CFA Level 1 Practice Exam Questions with Complete Answers Three steps to computing time-weighted returns - Answer-1) price the portfolio immediately prior to any significant addition or withdrawal of funds 2) calculate the holding period return on the portfolio for each subperiod 3) Link or ...

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  • March 3, 2024
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CFA Level 1 Practice Exam Questions
with Complete Answers
interest rate (yield) - Answer-a rate of return that reflects the relationship between
differently-dated -timed cash flows

ex) Interest Rate if - 9500 today and 10,000 one year from now are equivalent, what is
the interest rate? - Answer-10,000-9500= 500 USD. 500/9500= .0526 or 5.26 =r

three ways to consider interest rates - Answer-1) required rates of return - the minimum
an investor will accept to invest
2) discount rates- the rate at which a sum is discounted to represent future value
3) opportunity costs - cost of current consumption rather than saving and investing a
sum

formula to calculate interest rate - Answer-real risk-free interest rate + inflation premium
+ default risk premium + liquidity premium + maturity premium

Real risk-free interest rate - Answer-The single-period interest rate for a completely risk-
free security if no inflation were expected. helps indicate preference of current v future
consumption as inflation isn't considered

inflation premium - Answer-compensates investors for expected inflation and reflects
the average inflation rate expected over the maturity of the debt
ie) you need to pay them for the risk of inflation devaluing their $

default risk premium - Answer-compensates investors for the possibility that the
borrower will fail to make a promised payment at the contracted time and in the
contracted amount
ie) you need to pa them for the risk that they may not get their $ back

liquidity premium - Answer-compensates investors for the risk of loss relative to an
investment's fair value if the investment needs to be converted to cash quickly
ie) you need to pay them if it is costly (time or $) to liquidate a position

Maturity Premium - Answer-compensates investors for the increased sensitivity of the
market value of debt to a change in market interest rates as maturity is extended
ie) need to pay bc the more mature an investment becomes, the more sensitive to
changes in its market value

nominal interest rate - Answer-real risk-free interest rate + inflation premium
ie) practical

,Holding Period Return - Answer-the return earned from holding an asset for a single
specified period of time

Holding Period Return Formula - Answer-R=((P1-P0)+ I1)/P0

how to find HPR - Answer-((1+r1)(1+r2)(1+R3))-1

calc holding period return over many years example - Answer-R1= 14, R2= -10 R3=-2
((1.14)(.98)(.9))-1=.00548

geometric mean return - Answer-((1+R1)(1+R2)(1.R3))^(1/3)-1

geomtric mean return example - Answer-R1=22 R2=-25 R3=11
((1.22)(.75)(1.11))^(1/3)-1
= .52%

harmonic mean - Answer-used to find the mean of fractions/rates / ratios

use of harmonic mean when calculating three P/Es - Answer-P/E1= 45 PE2= 15 PE3=
15
(1/45)+(1/15)+(1/15)= .1556
n(or 3) /.1556 = 19.285

Cost averaging - Answer-The periodic investment of a fixed amount of money.

example of cost averaging and the harmonic mean - Answer-investor pays
$1000/month for two months. prices were $10 and $15 at each time. what did he pay on
average?
2/((1/10)+(1/15)=12

when to use arithmetic mean - Answer-when the sample includes all values including
outliers

when to use geometric mean - Answer-when the sample is compounding

when to use harmonic, trimmed, or winsorized mean - Answer-when the sample
inclsudes extreme outliers

Money Weighted Return - Answer-the IRR of a portfolio based on all cash flows

IRR - Answer-discount rate at which the sum of present values of cash values will equal
zero

positive cash flow - Answer-money flows TO the investor

negative cash flow - Answer-money flows away from investor

,time-weighted rate of return - Answer-The compound rate of growth of one unit of
currency invested in a portfolio during a stated measurement period; a measure of
investment performance that is not sensitive to the timing and amount of withdrawals or
additions to the portfolio.

Three steps to computing time-weighted returns - Answer-1) price the portfolio
immediately prior to any significant addition or withdrawal of funds
2) calculate the holding period return on the portfolio for each subperiod
3) Link or compound holding period returns to obtain an annual rate or return for the
year

how to find time-weighted return - Answer-TWR= (Gmean P1)(Gmean P2)^1/2 - 1

dividend discount model formula - Answer-rate= (dividend/price) + growth

Dividend Discount Model with pe ratio - Answer-p/e=dividend payout / (rate - growth)
Ethics:

The ______________ of the CFA BoD has overall the Professional Conduct Program
and enforcement of the Code and Standards

Several circumstances can prompt an inquiry from the ________________ (through the
Professional Conduct staff), such as: (4 things).

The Officer may decide one of 3 decides upon investigation. - Answer-Disciplinary
Review Committee

CFA Institute Designated Officer

*SWPP*
-*Self* Disclosure by members / candidates on their professional Conduct Statements of
involvement in a civil / criminal complaint.
-*Written* Complaints about a member or candidate's professional conduct received by
the staff
-Evidence of misconduct received through *public* sources (media)
-CFA exam *proctor* report of a violation


i) that no disciplinary sanctions are appropriate,
ii) to issue a cautionary letter, or
iii) to discipline the member or candidate

Code of Ethics - 6 pillars - Answer-*A PUPPI*

, ■ *Act* with integrity, competence, diligence, respect, and in an ethical manner with the
public, clients, prospective clients, employers, employees, colleagues in the investment
profession, and other participants in the global capital markets.
■ *Place* the integrity of the investment profession and the interests of clients above
their own personal interests.
■ *Use* reasonable care and exercise independent professional judgment when
conducting investment analysis, making investment recommendations, taking
investment actions, and engaging in other professional activities.
■ *Practice* and encourage others to practice in a professional and ethical manner that
will reflect credit on themselves and the profession.
■ *Promote* the integrity of and uphold the rules governing capital markets.
■ Maintain and *improve* their professional competence and strive to maintain and
improve the competence of other investment professionals.

Standards of Professional Conduct - Answer-*PC DESIRE*

- *P*rofessionalism.
- Integrity of *C*apital Markets.
- *D*uties to Clients.
- Duties to *E*mployers.
- Investment Analysi*S*, Recommendations, and Action.
- Conflicts of *I*nterest.
- *Re*sponsibilities as a CFA Institute Member or CFA Candidate.

*P*rofessionalism. - Answer-*KIMM*el

a. Knowledge of the Law / Code. Members understand and comply with all laws -
KVIOA

i. Know laws in *all countries* in which they trade securities.
ii. Responsible for violations in which they *knowingly* participate.
iii. If *illegal* actions of client, customer or personal Code Violation - Must dissociate.
iv. If violation of Code by fellow member - strongly encourage to report. No requirement
to report unless law.
v. When going with the 'applicable law' - Code vs country of residence vs. country of
business... go with the strictest! But if 'law of locality' is stated, then go with that. (Ie.
Member resides in MS (more strict than Code) country, does business in LS (less strict
than Code) country; MS law applies, but can state that law of locality where business is
conducted governs.) Member must adhere to the Code and Standards. Not the MS
laws.

b. Independence and Objectivity. (GSBPT)

i. Modest gifts and entertainment are acceptable. Must be disclosed. If from client, must
be disclosed to employer (if contingent of future perform.. see ACA need consent too)

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