FinQuiz.com CFA Level I 6th Mock Exam June, 2015 Revision Copyright © 2010-2015 FinQuiz.com All rights reserved Copying, reproduction or redistribution of this material is strictly prohibited info@finquiz.com CFA Level I Mock Exam – Questions (PM) FinQuiz.com – 6th Mock Exam 2015 (PM Session) Questions Topic Minutes 1-18 Ethical and Professional Standards 27 19-32 Quantitative Methods 21 33-44 Economics 18 45-68 Financial Reporting and Analysis 36 69-76 Corporate Finance 12 77-88 Equity Investments 18 89-94 Derivative Investments 95-106 Fixed Income Investments 18 107-112 Alternative Investments 113-120 Portfolio Management 12 Total 180 FinQuiz.com © 2015 - All rights reserved CFA Level I Mock Exam – Questions (PM) Questions through 18 relate to Ethical & Professional Standards Janice Hart is a research analyst serving Time Associates, an investment banking firm She has been asked to write a research report on Blue Inc Time was the chief underwriter of Blue Inc.’s stock when it had undertaken an IPO two years ago In addition, two of Time’s directors continue to hold a significant proportion of Blue Inc shares Hart’s best course of action will be to: A decline writing the research report due to the presence of a conflict of interest B write the research report and disclose the special relationship to clients on a request basis C write the research report and include a disclosure of the special relationship between Time Associates and Blue Inc Wallace Associates is a sell-side research firm with clients primarily from the financial services sector Midland Trust is Wallace Associates’ most recent client Sarah Parker, a research analyst has been assigned Midland Trust Parker is compensated with a basic research fee and agent options, which allow her to purchase 2% of her client’s common shares if the stock performs well After conducting thorough research using public sources, she determines that a buy recommendation will be most appropriate She includes a small footnote at the end of the report that discloses the volume and expiration date of the options she is eligible for According to the Standards of Practice Handbook, Parker is in: A violation because her disclosure is not prominent B compliance because she has disclosed the extent of her participation in the options C violation because the acceptance of the agency options may impair her independence and objectivity FinQuiz.com © 2015 - All rights reserved CFA Level I Mock Exam – Questions (PM) Trisha Jose is a supervisor at a commercial bank She has been informed that particular employee has been deliberately delaying sending reminders to clients whose accounts are overdue With respect to the employee, Jose’s best course of action to take is: A dismissal B issuing a warning C suspension of responsibilities An investment manager notifies clients of a change in recommendation via email He then calls three of his oldest clients to discuss the change in greater detail Not all his clients receive the recommendation at the same time and are unhappy with the delay in notification Has the investment manager dealt with his clients fairly? A Yes, he is only required to ensure each client is fairly dealt with B No, he should have discussed the recommendation in greater detail with all his clients C No, he should have ensured each client received the recommendation at the same time According to the Standards of Practice Handbook, an investment manager who learns that his client is engaged in an illegal activity should: A seek legal counsel B inform legal authorities C disclose the activity to the CFA Institute FinQuiz.com © 2015 - All rights reserved CFA Level I Mock Exam – Questions (PM) Joyce & Monroe (J&M) is an investment bank with its own research division Investment banker Ron Howard serves J&M and has recently arranged corporate financing for its client, Westdale Limited Westdale will be using the financing to expand production to Australia Several weeks later J&M’s chief research analyst issues a research report on Westdale wherein he recommends, “Westdale’s decision to expand into Australia is an excellent move because the potential market for its products should be vast I am extremely confident that the company will see a remarkable and positive difference in its earnings over the coming months Based on this, I recommend a strong BUY.” According to the Standards of Practice Handbook, the analyst’s recommendation is most likely in violation with respect to the standard concerning: A misrepresentation; he is guaranteeing investment performance B disclosure of conflicts; he has not disclosed J&M’s relationship with Westdale C communication with clients and prospects; he has failed to separate opinion from fact According to the Standards of Practice Handbook, adequate compliance procedures are least likely those that: A meet industry standards B are uniform on a global basis C can be tailored to the circumstances of a firm When managing pooled assets to a specific mandate, investment manager (‘s): A actions are not governed by the suitability standard B must consider the suitability of an investment for clients C need not consider the suitability of an investment for clients Which of the following most likely to be the key feature of GIPS standards? GIPS standards: A rely on the integrity of input data B address every aspect of performance measurement C have evolved over time to focus primarily on returns FinQuiz.com © 2015 - All rights reserved CFA Level I Mock Exam – Questions (PM) 10 Nelson Won, CFA, is a tax advisor at a financial services firm His recent article, on how tax minimization strategies can be effectively implemented for client portfolios with high tax brackets, has increased his popularity in the industry Won is offered to deliver a lecture on tax minimization strategies to employees of an investment management firm in New Zealand The firm offers to pay for his travel expenses and hotel accommodation Won accepts the offer, informs his employer, and travels to New Zealand with the trip fully paid by his employer At the conclusion of the lecture, Won is invited to a game of golf at an exclusive club by the senior investment manager He accepts the offer and informs his supervisor of the invitation upon his return According to the Standards of Practice Handbook, Won is most likely: A in violation; he should have paid for the New Zealand trip out of his own pocket B in violation; he did not seek written permission prior to accepting the golf game offer C in compliance; details of the golf game were not available to him before departing for New Zealand 11 Conduct that constitutes a violation of the CFA Institute Standards of Professional Conduct concerning ‘Conduct as Members and Candidates in the CFA Program’ includes: A cheating on an MBA exam B soliciting employer clients prior to departing C not following security measures implemented for the CFA exam FinQuiz.com © 2015 - All rights reserved CFA Level I Mock Exam – Questions (PM) 12 Fredric Hart has shifted to Trust Management from Rightway Investments, both of which are brokerage firms providing asset advisory services At Trust Management Hart prepares a brief introduction letter where he highlights the type of accounts and asset classes he managed as well as the performance results achieved at Rightway Hart’s first client at Trust Management is Denver Sports Inc He will be responsible for managing the client’s pension plan After conducting a suitability analysis, Hart determines that direct real estate is a suitable asset class and makes an allocation basing his decision on the following three reasons: 1) Denver has low liquidity needs, 2) Denver has a long-time horizon and 3) Denver is in a low capital gains tax bracket According to the Standards of Practice of Handbook, Hart is most likely in violation of the standard concerning: A loyalty to employer; he has divulged confidential past employer information B loyalty, prudence and care; he has not acted in the best interests of his clients C client confidentiality; information concerning account types is considered confidential information 13 Marie Thatcher serves the CFA Institute Board of Governors, which is responsible for the oversight and responsibility for the Professional Conduct Program She also manages the investment portfolios of several friends and family members In a discussion with one of her clients, Thatcher states, “As a board member, I will take additional steps to ensure that your interests are looked after and violations of the Code and Standards are avoided at all costs Furthermore, as your portfolio manager I will be kept up-to-date with the latest developments of and revisions in the Code and Standards.” Thatcher’s statement is most likely: A in violation; she is guaranteeing client account performance B in compliance with the CFA Institute Standards of Professional Conduct C in violation; she is using her association with the CFA Institute to further professional goals FinQuiz.com © 2015 - All rights reserved CFA Level I Mock Exam – Questions (PM) 14 15 Two investment managers engaged in a debate that quickly turned into a conflict disrupting the working environment of their fellow co-workers Which of the following has most likely been violated? A Code of Ethics only B Standards of Professional Conduct only C Both Code of Ethics and Standards of Professional Conduct In order to comply with the CFA Institute Code of Ethics, members and candidates must: A promote the integrity of the legal system B maintain their duty of loyalty towards clients, prospects and employers C place the integrity of the investment profession above their own personal interests 16 Which of the following statements least likely highlights a benefit of claiming compliance with GIPS standards? A GIPS standards eliminate the need for the investor to conduct in-depth due diligence B Investment managers can assure clients that the reported historical track record is complete C Prospective clients can easily compare the performance of their investment managers across different firms 17 Hollard Associates manages two funds, a diversified fund and a fixed-income fund The diversified fund is three years old while the fixed-income fund is as old as the firm (five years old) The performance records of both funds are GIPScompliant The firm is now considering claiming compliance to the GIPS standards Which of the following statements most accurately highlights what Hollard Associates should in order to claim compliance? Hollard Associates should: A wait for at least two years to claim compliance B only claim compliance for the fixed-income fund C can claim compliance by presenting performance since both composites’ creation dates FinQuiz.com © 2015 - All rights reserved CFA Level I Mock Exam – Questions (PM) 18 Which of the following is not a section of the Global Investment Performance Standards? A Hedge funds B Private equity C Wrap fee portfolios FinQuiz.com © 2015 - All rights reserved CFA Level I Mock Exam – Questions (PM) Questions 19 through 32 relate to Quantitative Methods 19 A limitation most likely associated with IRR is that it: A is sensitive to the external discount rate B it does not represent an achievable rate of return on an investment C cannot be calculated for projects with an unconventional cash flow pattern 20 Tara Gibbons would like to ensure she lives comfortably during her retirement, which will commence thirty years from now Her financial manager, Raul Peterson, advises that she should save a fixed amount each year for the next twelve years and determines that her savings will grow to $45,155 by the end of the twelfth year if she does so Peterson also determines that the present value of the funds required for retirement will amount to $250,878 at t = 12 Funds are invested to generates 6% annual rate of return For the savings to grow from $45,155 to $250,878, Gibbons will need to make an annual investment of: A $19,000 B $19,635 C $35,042 21 A desirable property of an estimator includes: A consistency B universality C independence 22 Mona Patel has invested a portion of her savings in a fund with a stated annual rate of 4%, which is compounded quarterly If Patel’s fund was continuously compounded, the fund’s stated annual rate of return would have been closest to: A 3.98% B 4.00% C 4.06% FinQuiz.com © 2015 - All rights reserved 10 CFA Level I Mock Exam – Questions (PM) Questions 77 through 88 relate to Equity Investments 77 The market price of Yacto’s stock decreased by $2 over the financial year 2013 If the share price at the beginning of the year was $52.50, what dividend yield must the company maintain to ensure total return is equal to 15%? A 3.81% B 11.19% C 18.81% 78 A trader who purchases a global registered share will most likely: A not need to be concerned with currency conversions B be able to track the performance of the underlying index C have an indirect, economic interest in a foreign company 79 ABC Limited has reported a return on equity, net profit margin and financial leverage ratio of 15.0%; 0.32; and 2.5 respectively Asset turnover of ABC Limited is closest to: A 0.12 B 0.19 C 18.75% 80 Blake Associates is a financial services firm operating in a fragmented industry Lucas Mathews, a market analyst, determines that the structure of the industry will have implications for the company’s market share, coordination among industry players, and price competition in the industry Which of the following conclusions is most likely valid concerning industry structure? A Price competition is fierce B The relationship among industry players is cooperative C A small increase in Blake’s market share can significantly increase its profitability FinQuiz.com © 2015 - All rights reserved 29 CFA Level I Mock Exam – Questions (PM) 81 An analyst has collected the following information concerning a value weighted index: Security A B C Beginning of Period Price ($) Shares 45.56 100 61.05 200 88.07 300 End of Period Price ($) 51.87 67.00 91.35 Shares 100 200 300 The return on the index is closest to: A 6.50% B 7.42% C 18.51% 82 A brokered market: A is organized as an order-driven market B uses a crossing network to organize market trades C is the platform for trading unique and infrequently traded instruments 83 Sylvia Perez has purchased a 3-month put option with an exercise price of $35.00 by paying $5.50 The purpose behind the option purchase is to protect her investment from adverse price movements Perez will exercise the option if the share price: A rises above $35.00 B declines below $35.00 C declines below $40.50 FinQuiz.com © 2015 - All rights reserved 30 CFA Level I Mock Exam – Questions (PM) 84 The exhibit below illustrates the limit order book for the Japanese equity market: Exhibit: Japanese Equity Market’s Limit Order Book Bid Size Limit price (¥) Offer Size 172.68 10 168.90 12 163.57 160.00 14 158.42 16 151.75 146.89 145.63 The market bid-ask spread is closest to: A 1.58 B 16.68 C 27.05 85 In contrast to public equity firms, the private equity firm: A operates in larger, unregulated markets B management tend to focus on maximizing short-term results C has less effective corporate governance policies and procedures 86 In contrast to the method of fundamentals, the method of comparables: A does not consider the future B is based on the law of one price C is more sensitive to assumptions 87 Gem Inc has paid a dividend of $4.55 in the current year From next year onwards, annual dividend will grow at an indefinite rate of 2% The company’s shareholders require an 8% return to compensate for the risk associated with equity shares The intrinsic value of the stock is closest to: A $75.83 B $77.35 C $78.90 FinQuiz.com © 2015 - All rights reserved 31 CFA Level I Mock Exam – Questions (PM) 88 Lockwood Associates is a recently established financial services firm The company will not be paying its shareholders dividends in the near future due to insufficient profits The date for initiating dividend payments is highly uncertain Which model will be most suitable for valuing the intrinsic value of company stock? A Free cash flow model B Gordon growth model C Dividend discount model FinQuiz.com © 2015 - All rights reserved 32 CFA Level I Mock Exam – Questions (PM) Questions 89 through 94 relate to Derivatives 89 Which of the following derivative instruments entails default risk which is from the short to the long only? A Swaps B Options C Forwards 90 Which of the following statements most accurately describes margin in securities and futures markets? Margins in: A futures markets are set by federal regulators B securities markets magnify the gains and losses on an investment C securities and futures markets serve to reduce the amount required for investment 91 Which of the following factors will have the most significant and positive impact on call option prices where the underlying is non-financial in nature? Increase in: A volatility B interest rates C underlying cash flows 92 Jacqueline Rogers holds shares with a current market price of $25 and would like to protect her investment from a decline in value She undertakes a protective put strategy by purchasing 6-month options selling for $2.55 each with an exercise price of $22 On the expiration date of the options, the market price declines to $20 The breakeven price of the share at expiration is closest to: A $22.55 B $24.55 C $27.55 FinQuiz.com © 2015 - All rights reserved 33 CFA Level I Mock Exam – Questions (PM) 93 Consider a put option selling for $4 in which the exercise price is $34 and the price of the underlying is $36 If the price of the underlying at expiration is $37, the profit for the option seller is closest to: A B $4 C $7 94 Over the counter derivatives are: A subject to the risk of default B are guaranteed against default through the clearinghouse C are guaranteed against decrease in value through the clearinghouse FinQuiz.com © 2015 - All rights reserved 34 CFA Level I Mock Exam – Questions (PM) Questions 95 through 106 relate to Fixed Income 95 Alex Cunningham is comparing three fixed-income securities held in his investment portfolio He would like to determine the issue offering the highest interest yield Details regarding the three issues are summarized in the exhibit below: Exhibit: Details Concerning Fixed Income Issues A B C Full price per 100 of par value $98.85 $99.70 $103.30 Accrued interest $5.40 $3.10 $2.85 Coupon rate 3% 2% 3% Coupon payment frequency Annually Quarterly Semi-annually Which issue offers the highest interest yield? A A B B C C 96 A 5%, fifteen-year callable bond issue is priced at 98.56 per 100 of par value at the time of issue The par value of each bond is $1,000 The bond is first callable on December 31, 2018 at a price of 105.34 of par value Thereafter, call prices will steadily decline being equal to 103.45 in the year 2019 and finally declining to 100 in 2020, the year of maturity The call premium in 2018 is closest to: A $1.44 B $34.50 C $53.40 97 A deferred coupon bond: A is issued at a premium to par B permits in kind interest payments C provides tax advantages to the issuer FinQuiz.com © 2015 - All rights reserved 35 CFA Level I Mock Exam – Questions (PM) 98 Karl Tatsimo invests in two bond issues; a two-year, 5.00% semi-annual coupon payment corporate bond priced at 95.67 per 100 of par value and a three-year, 3.00% semi-annual coupon payment government bond priced at 93.45 per 100 of par value The corporate bond’s annual yield-to-maturity stated on a semi-annual basis is: A equal to 7.37% B equal to that of the government bond C lower than that of the government bond 99 Fixed-income securities that are issued with a maturity of less than one year are most likely known as: A Eurobonds B money market securities C capital market securities 100 In the event of company default, the debt category that will rank the highest is: A first lien debt B second lien debt C senior unsecured debt 101 A risk of relying on credit agency ratings least likely include that they: A may be fallible B overestimate event risk C tend to lag bond prices and credit spread movements FinQuiz.com © 2015 - All rights reserved 36 CFA Level I Mock Exam – Questions (PM) 102 The Jameson Foundation has a fixed income portfolio comprising of three corporate bonds, A, B and C The exhibit below summarizes details concerning the fixed income portfolio: Annual modified duration Annual modified convexity Price per par value Exhibit A 3.4 12.2 92.34 B 7.8 16.9 95.78 C 12.3 23.8 99.35 If the yield changes by 50 basis points, the security that will exhibit the greatest percentage price change is: A A B B C C 103 Which of the following prices is most likely quoted by dealers? A Clean price B Matrix price C Invoice price 104 Based on the information provided in the exhibit below, Tower Two Inc.’s interest coverage is closest to: Exhibit Gross profit Operating expenses Operating income Interest expense Interest income Depreciation and amortization $ ‘000s 2,450 950 1,500 85 20 320 A 17.65x B 21.41x C 28.00x FinQuiz.com © 2015 - All rights reserved 37 CFA Level I Mock Exam – Questions (PM) 105 Relative to an option-free, a putable bond will most likely: A trade at a higher yield B trade at a higher price C is associated with a higher reinvestment risk 106 An investor purchases a 2-year, 10% annual coupon payment corporate bond at a market discount rate of 5% The forward curve for one-year rates is demonstrated in the exhibit below: Exhibit Time period Forward rate 0y1y 1.0535% 1y1y 2.7984% 2y1y 3.0367% 3y1y 4.7842% Using the forward rates, the price of the corporate bond per 100 of par value is closest to: A $109.30 B $113.32 C $115.78 FinQuiz.com © 2015 - All rights reserved 38 CFA Level I Mock Exam – Questions (PM) Questions 107 through 112 relate to Alternative Investments 107 The exhibit below illustrates real estate valuation data collected by Simone Irk, an investment analyst The data collected by Irk concerns real estate investment trusts (REITs) The analyst would like to employ a direct capitalization approach when comparing the relative valuations of the three REITs (A, B and C) REIT A B C Exhibit: Valuation Data Concerning REIT A, B, and C Net Gains Recurring Funds from from Sales Capital Capitalization Rate operations of Real Estate Expenditures $35,000 $4,200 $12,000 5% $80,000 $12,400 $28,000 8% $75,000 $9,900 $33,500 6% Using adjusted funds from operations (AFFO), the REIT with the highest valuation is: A A B B C C 108 The most suitable measure for evaluating the performance of alternative investments, in general, is the: A Sharpe ratio B Sortino ratio C value added risk (VAR) 109 When commodity futures prices are higher than spot prices, the futures market is said to be in a state of: A contango and the convenience yield is low B contango and the convenience yield is high C backwardation and the convenience yield is low FinQuiz.com © 2015 - All rights reserved 39 CFA Level I Mock Exam – Questions (PM) 110 The characteristics that make a company particularly attractive as an LBO target least likely include a firm: A with depressed stock price B that is inefficiently managed C with weak & unsustainable cash flows 111 A hedge fund with $120 million of initial investment, 2-20 fee structure and a hurdle rate of 5%, earned 35% return at year end Assuming management fee is based on assets under management at year end and incentive fee is calculated net of management fee and is based on return in excess of the hurdle rate, an investor’s net return in $ terms is closest to: A $15.12 million B $27.40 million C $32.88 million 112 An analyst listed the following characteristics of alternative investments as an asset class in general Less transparency High level of regulation Narrow manager specialization Potentially problematic historical risk and return data How many characteristics he identified correctly? A B C FinQuiz.com © 2015 - All rights reserved 40 CFA Level I Mock Exam – Questions (PM) Questions 113 through 120 relate to Portfolio Management 113 Maxine Carrell, a university professor, made the following statements during a lecture: Statement 1:“The capital allocation line joins the optimal risky portfolio and the risk-free asset.” Statement 2:“The portfolio of an optimal investor must lie on the capital allocation line.” Carrell is most likely correct with respect to: A Statement only B Statement only C Statement and Statement 114 If an investor is opting for an investment strategy that offers guaranteed outcome, then such an investor will most likely be classified as: A risk seeker B risk averse C risk neutral 115 In contrast to open-end funds, a disadvantage of investing in closed-end funds is that they: A have a limited ability to grow B charge fees for investing in and redeeming from the fund C may require the manager to liquidate assets for meeting redemptions at a point in time when least desirable FinQuiz.com © 2015 - All rights reserved 41 CFA Level I Mock Exam – Questions (PM) 116 The exhibit below summarizes data concerning annual returns, annual standard deviation and betas for an investor’s two asset portfolio The portfolio’s expected return is equal to 15% Exhibit: Annual Annual Standard Return (%) Deviation (%) 14 10 18 16 Asset A B Beta 1.5 0.9 The amount invested in both assets is respectively closest to: A B C Asset A: 17% 42% 75% Asset B: 83% 58% 25% 117 Mitchell Young holds an investment portfolio comprising two equity securities, A and B The portfolio is equally invested in the two securities The exhibit below summarizes annual risk and return data concerning Young’s portfolio: Security A B Exhibit Annual Annual Standard Return (%) Deviation (%) 22 17 16 13 If the covariance of returns between the two securities is – 0.0157, the correlation between the two securities is closest to: A – 0.71 B – 0.44 C + 0.19 118 The slope of the capital allocation line (CAL) is measured using the: A Sharpe ratio B Treynor ratio C information ratio FinQuiz.com © 2015 - All rights reserved 42 CFA Level I Mock Exam – Questions (PM) 119 The exhibit below summarizes risk, return and beta information concerning the Lightman Foundation’s investment portfolio Stock A B C D Total Exhibit: Annual Standard Deviation (%) Beta 23.5 1.5 9.4 0.6 8.5 1.1 12.5 0.3 Weight in Portfolio (%) 25 30 10 35 100 Based on the information presented, portfolio beta is closest to: A 0.14 B 0.77 C 0.87 120 Tactical asset allocation: A focuses on adding portfolio value in the short-run B deviates from policy exposures to nonsystematic risk factors C selects securities with an expected return higher than the asset class benchmark FinQuiz.com © 2015 - All rights reserved 43 ... Bid Size Limit price (¥) Offer Size 172 .68 10 168 .90 12 163 .57 160 .00 14 158.42 16 151.75 1 46. 89 145 .63 The market bid-ask spread is closest to: A 1.58 B 16. 68 C 27.05 85 In contrast to public equity.. .CFA Level I Mock Exam – Questions (PM) FinQuiz.com – 6th Mock Exam 2015 (PM Session) Questions Topic Minutes 1-18 Ethical and Professional... FinQuiz.com © 2015 - All rights reserved 25 CFA Level I Mock Exam – Questions (PM) Questions 69 through 76 relate to Corporate Finance 69 Natalie Brooks is contemplating an investment in the GR stock