CFA LEVEL 1 QUESTIONS AND ANSWERS

CFA LEVEL 1 QUESTIONS AND ANSWERS What are the 4 types of measurement scales? - CORRECT ANSWER-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? - CORRECT ANSWER-Arithmetic Mean: To estimate next year's return Geometric Mean: Measure of past performance What are the 3 different types of probabilities? - CORRECT ANSWER-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? - CORRECT ANSWER-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? - CORRECT ANSWER-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 are the steps of Hypothesis Testing? - CORRECT ANSWER-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 is a Type 1 and Type 2 Error? - CORRECT ANSWER-Type I: Rejection of null when it is actually true Type II: Failure to reject null when it is actually false What are the 3 reasons why statistical significance does not imply economic significance? - CORRECT ANSWER-1. Transaction Costs 2. Taxes 3. Risk What is the key assumption of technical analysis? - CORRECT ANSWER-Market prices reflect both rational and irrational investor behavior What are the 4 different types of Oscillators? - CORRECT ANSWER-1. Rate of Change Oscillator (100x the difference between the latest closing price and the closing price n periods earlier) 2. Relative Strength Index (Ratio of total price increases to price decreases) 3. Moving Average Convergence/Divergence 4. Stochastic Oscillator (Latest closing price and highest and lowest prices reached in a period) What are the different types of auctions? - CORRECT ANSWER-1. English Auction (Ascending Price Auction) 2. Vickrey Auction (Second Price Sealed Bid Auction) 3. Dutch Auction (Descending Price Auction) What are the 3 rules of indifference curves? - CORRECT ANSWER-1. Slope downward 2. Convex towards the origin 3. Curves cannot cross Distinguish between Normal, Inferior, Giffen and Veblen Goods? - CORRECT ANSWER-Normal: Positive income effect Inferior: Income effect is negative Giffen: Negative income effect outweighs positive substitution effect Veblen: Higher price makes the good more desirable What are the 4 models of oligopoly? - CORRECT ANSWER-1. Kinked Demand Curve Model (Only a decrease in price will be followed by competitors) 2. Cournot Duopoly Model 3. Nash Equilibrium Model 4. Stackelberg Dominant Firm Model What is necessary for price discrimination to work? - CORRECT ANSWER-1. Face a downward-sloping demand curve 2. Have at least two identifiable groups of customers with different elasticities 3. Be able to prevent reselling What are the different economic theories of the business cycle? - CORRECT ANSWER1. Neoclassical School (Driven by changes in technology) 2. Keynesian School (Cycles are due to swings in the level of optimism of business owners) 3. Monetarist School (Cycles are caused by variations in the rate of growth of the money supply) 4. Austrian School (Cycles are caused by government intervention) 5. Real Business Cycle Theory (Cycles are caused by changed in technology and external shocks) Describe the 3 types of unemployment. - CORRECT ANSWER-1. Frictional Unemployment (Results from time lag of matching employees with employers) 2. Structural Unemployment (Caused by changes in economy that eliminate some jobs and create new ones) 3. Cyclical Unemployment (Caused by changes in the level of economic activity) What are the 3 main functions of money? - CORRECT ANSWER-1. Medium of Exchange 2. Unit of Account 3. Store of Value What are the 3 reasons for holding money? - CORRECT ANSWER-1. Transaction Demand (Held to meet the need for transactions) 2. Precautionary Demand (Held for unforeseen future needs) 3. Speculative Demand (To take advantage of investment opportunities in the future) What are the 6 key roles of the central bank? - CORRECT ANSWER-1. Sole supplier of currency 2. Banker to the government and other banks 3. Regulator of payments system 4. Lender of last resort 5. Holder of gold and foreign exchange 6. Conductor of monetary policy What are the 3 main monetary policy tools of the central bank? - CORRECT ANSWER1. Policy Rate 2. Reserve Requirements 3. Open Market Operations (Buying and selling of securities by the Central Bank) What are the 3 essential qualities of a Central Bank? - CORRECT ANSWER-1. Independence (Should be free from political interference) 2. Credibility 3. Transparency (Disclosing the state of the economy by issuing inflation reports) What are the 5 types of regional trading agreements? - CORRECT ANSWER-1. Free Trade Areas (All barriers to trade are removed) 2. Customs Union (Adopt a common set of trade restrictions with non-members) 3. Common Market (Barriers to the movement of labor and capital are removed) 4. Economic Union (Establish common economic policy) 5. Monetary Union (Adopt a single currency) What is included in the 3 balance of payment accounts? - CORRECT A