CFA LEVEL 1 QUESTIONS AND ANSWERS
What are the 4 types of measurement scales? - Answers -1. Nominal Scales
2. Ordinal Scales (Assigned to a category)
3. Interval Scales (Relative ranking)
4. Ratio Scales (Equal differences between scale values)
NOIR
When do we use geometric and arithmetic means to analyze investment returns? -
Answers -Arithmetic Mean: To estimate next year's return
Geometric Mean: Measure of past performance
What are the 3 different types of probabilities? - Answers -1. Empirical Probability (Past
data)
2. Priori Probability (Formal reasoning)
3. Subjective Probability (Use of personal judgement)
What is the difference between time-series data and cross-sectional data? - Answers -
Time-Series: Data taken over a period of time
Cross-Sectional: Data taken at a single point in time
What are the 3 desirable properties of an estimator? - Answers -1. Unbiased (Expected
value of estimator is equal to the parameter)
2. Efficient (Variance of its sampling distribution is small)
3. Consistent (Accuracy of parameter estimate increases as sample size increases)
What is included in the 3 balance of payment accounts? - Answers -1. Current Account:
Merchandise and services, foreign dividends and interest and money received from
abroad
2. Capital Account: Capital transfers and sales and purchases of non-financial assets
3. Financial Account: Government owned-assets abroad and foreign owned assets in
the country
What are the different types of auditor opinions? - Answers -1. Unqualified Opinion:
Statements are free from errors
2. Qualified Opinion: Some exceptions to accounting principles
3. Adverse Opinion: Statements are not within accounting standards
4. Disclaimer of Opinion: Unable to make an opinion
What are the 6 steps in the Financial Statement Analysis Framework? - Answers -1.
State the objective
2. Gather data
3. Process the data
4. Analyze and interpret the data
5. Report the conclusions or recommendations
6. Update the analysis
, What are the 3 objectives of financial market regulation? - Answers -1. Protect investors
2. Ensure fairness, efficiency and transparency of markets
3. Reduce systemic risk
What are the 2 main fundamental qualitative characteristics that make financial
information useful? - Answers -1. Relevance
2. Faithful Representation
What are the 4 characteristics that enhance relevance and faithful representation? -
Answers -1. Comparability
2. Verifiability
3. Timeliness
4. Understandability
What are the 4 capital budgeting steps? - Answers -1. Idea generation
2. Analyzing project proposals
3. Create the firm-wide capital budget
4. Monitoring decisions and conducting a post-audit
What are the 5 basic principles of capital budgeting? - Answers -1. Decisions are based
on cash flows
2. Cash flows are based on opportunity costs
3. Timing of cash flows is important
4. Cash flows are analyzed after tax
5. Financing costs are reflected in the project's required rate of return
What are the 3 methods to repurchase shares? - Answers -1. Buy in the open market at
the market price
2. Buy a fixed number of shares at a fixed price (Tender offer)
3. Repurchase by direct negotiation (Negotiate directly with a large shareholder)
What are the 3 steps in the portfolio management process? - Answers -1. The Planning
Step (Analysis of investor's risk tolerance, return objectives, time horizon, tax exposure,
liquidity needs etc; results in IPS)
2. The Execution Step (Analysis of the risk and return of various asset classes)
3. The Feedback Step (Monitor changes and re-balance the portfolio)
What are the steps of Hypothesis Testing? - Answers -1. State the hypothesis
2. Select the appropriate test statistic
3. Specify the level of significance
4. State the decision rule regarding the hypothesis
5. Collect the sample and calculate the sample statistics
6. Make a decision regarding the hypothesis
7. Make a decision based on the results of the test
What are the 4 types of measurement scales? - Answers -1. Nominal Scales
2. Ordinal Scales (Assigned to a category)
3. Interval Scales (Relative ranking)
4. Ratio Scales (Equal differences between scale values)
NOIR
When do we use geometric and arithmetic means to analyze investment returns? -
Answers -Arithmetic Mean: To estimate next year's return
Geometric Mean: Measure of past performance
What are the 3 different types of probabilities? - Answers -1. Empirical Probability (Past
data)
2. Priori Probability (Formal reasoning)
3. Subjective Probability (Use of personal judgement)
What is the difference between time-series data and cross-sectional data? - Answers -
Time-Series: Data taken over a period of time
Cross-Sectional: Data taken at a single point in time
What are the 3 desirable properties of an estimator? - Answers -1. Unbiased (Expected
value of estimator is equal to the parameter)
2. Efficient (Variance of its sampling distribution is small)
3. Consistent (Accuracy of parameter estimate increases as sample size increases)
What is included in the 3 balance of payment accounts? - Answers -1. Current Account:
Merchandise and services, foreign dividends and interest and money received from
abroad
2. Capital Account: Capital transfers and sales and purchases of non-financial assets
3. Financial Account: Government owned-assets abroad and foreign owned assets in
the country
What are the different types of auditor opinions? - Answers -1. Unqualified Opinion:
Statements are free from errors
2. Qualified Opinion: Some exceptions to accounting principles
3. Adverse Opinion: Statements are not within accounting standards
4. Disclaimer of Opinion: Unable to make an opinion
What are the 6 steps in the Financial Statement Analysis Framework? - Answers -1.
State the objective
2. Gather data
3. Process the data
4. Analyze and interpret the data
5. Report the conclusions or recommendations
6. Update the analysis
, What are the 3 objectives of financial market regulation? - Answers -1. Protect investors
2. Ensure fairness, efficiency and transparency of markets
3. Reduce systemic risk
What are the 2 main fundamental qualitative characteristics that make financial
information useful? - Answers -1. Relevance
2. Faithful Representation
What are the 4 characteristics that enhance relevance and faithful representation? -
Answers -1. Comparability
2. Verifiability
3. Timeliness
4. Understandability
What are the 4 capital budgeting steps? - Answers -1. Idea generation
2. Analyzing project proposals
3. Create the firm-wide capital budget
4. Monitoring decisions and conducting a post-audit
What are the 5 basic principles of capital budgeting? - Answers -1. Decisions are based
on cash flows
2. Cash flows are based on opportunity costs
3. Timing of cash flows is important
4. Cash flows are analyzed after tax
5. Financing costs are reflected in the project's required rate of return
What are the 3 methods to repurchase shares? - Answers -1. Buy in the open market at
the market price
2. Buy a fixed number of shares at a fixed price (Tender offer)
3. Repurchase by direct negotiation (Negotiate directly with a large shareholder)
What are the 3 steps in the portfolio management process? - Answers -1. The Planning
Step (Analysis of investor's risk tolerance, return objectives, time horizon, tax exposure,
liquidity needs etc; results in IPS)
2. The Execution Step (Analysis of the risk and return of various asset classes)
3. The Feedback Step (Monitor changes and re-balance the portfolio)
What are the steps of Hypothesis Testing? - Answers -1. State the hypothesis
2. Select the appropriate test statistic
3. Specify the level of significance
4. State the decision rule regarding the hypothesis
5. Collect the sample and calculate the sample statistics
6. Make a decision regarding the hypothesis
7. Make a decision based on the results of the test
