Level 2 mock exam question and answers 2009

2009 Level II Mock Exam: Morning Session The morning session of the 2009 Level II Chartered Financial Analyst® Mock Examination has 60 questions To best simulate the exam day experience, candidates are advised to allocate an average of 18 minutes per item set (vignette and multiple choice questions) for a total of 180 minutes (3 hours) for this session of the exam Questions Topic Minutes 1-6 Ethical and Professional Standards 18 7-12 Quantitative Methods 18 13-18 Financial Statement Analysis 18 19-24 Financial Statement Analysis 18 25-30 Corporate Finance 18 31-36 Economics 18 37-42 Equity Investments 18 43-48 Fixed Income Investments 18 49-54 Derivative Investments 18 55-60 Portfolio Management 18 Total: 180 By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates Candidates may view and print the exam for personal exam preparation only The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose Questions through relate to Ethical and Professional Standards Sang-Gyung Jun Case Scenario Sang-Gyung Jun is enrolled in an MBA program and serves as an unpaid intern for Portree Investment Services During his internship, Jun’s supervisor at Portree, Barbara Fantine, teaches him several stock valuation techniques Jun hopes his unpaid internship will eventually result in full-time employment with Portree, and he enthusiastically recruits a number of wealthy clients, most of whom are members of Jun’s family Fantine praises his efforts, remarking that “these clients are the foundation on which you can build your career at Portree.” Despite his success, Jun’s internship remains unpaid even after he receives his MBA degree and passes the CFA® Level III examination Jun seeks full-time employment with Upsala Financial Corp which specializes in serving high net worth individuals When interviewing for the position at Upsala, Jun informs his interviewer that “I need to obtain only one more year of work experience before I will receive the CFA charter After the interview, Jun contacts the clients he has recruited at Portree to ask if they would become his clients at Upsala None of these clients accept this offer When Fantine learns of Jun’s plans to leave Portree, she informs Jun, “You are not permitted to use any of the valuation techniques I have taught you because they belong to me.” Jun subsequently accepts the position at Upsala and informs Fantine On the same day, Fantine receives news about the departure of another Portree employee, Jasmine Velez, CFA Velez is leaving to start an investment firm that will directly compete with Portree Velez has not contacted any potential clients, but during non-work hours she has incorporated her new firm and obtained the necessary licenses On Jun’s first day of work at Upsala, he receives and reviews a copy of the firm’s compliance policy, excerpts of which appear in Exhibit By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates Candidates may view and print the exam for personal exam preparation only The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose Exhibit Upsala Financial Corp Compliance Policy Independent Practice Employees of Upsala may enter into independent practice only in business segments not already targeted by Upsala, and only in roles clearly leading to improvements in employee skill and expertise that can be used beneficially by Upsala Priority of trades Transactions for employers must have priority over transactions in securities or other investments of which a member or candidate is the beneficial owner The interests of outside clients must be given priority over accounts registered in the name of Upsala itself Moreover, all personal trades by employees of Upsala firm will be pre-cleared in accordance with the firm’s compliance policies Jun also receives new business cards which read “Sang-Gyung Jun, CFA, Investment Consultant.” Jun mails letters of introduction with the business cards to contacts and potential clients In his first meeting with new colleagues Jun, wanting to create a favorable image states, “I passed all three CFA examinations on the first try, which places me in an elite category of exceptional charterholders.” Jun later impresses his supervisor at Upsala with his knowledge of stock valuation techniques He does not inform his supervisor that he learned the techniques from Fantine at Portree Several months later, Jun receives an offer of part-time consulting work from a family friend who needs assistance marketing investment services to high-net-worth individuals in Korea Jun reviews the firm’s policy on independent practice and confirms that Upsala does not conduct business in Korea Jun is convinced that the consulting work will improve his skills and thus benefit Upsala He accepts the consulting work which requires approximately three hours of late-night work on Mondays and Wednesdays Since Jun only requires 4-6 hours of sleep he does not feel that this night work will interfere with his responsibilities Jun then sends an email to his supervisor informing him of the consulting offer, its requirements, duration, compensation, and the skills he expects to develop from the work By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates Candidates may view and print the exam for personal exam preparation only The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose Did Jun’s actions immediately following his interview with Upsala most likely violate the CFA Institute Standards of Professional Conduct? A Yes B No, because he no longer owes a duty of loyalty to Portree C No, because the Portree clients have not accepted the offer to move When using the stock valuation methods at Upsala, does Jun violate any CFA Institute Standards of Professional Conduct? A No B Yes, because he does not have Fantine’s permission C Yes, because he does not inform his supervisor of the source of his knowledge When preparing to establish an investment firm, does Velez violate the CFA Institute Standard relating to Duty to Employer? A No B Yes, because she plans to compete directly with Portree C Yes, because she incorporated the firm before leaving Portree To make Upsala’s statement on Priority of Trades consistent with CFA Institute Standards, Jun’s most appropriate recommendation is to revise it so that: A the interests of clients must be given priority over accounts in which Upsala’s employees are beneficial owners B the interests of clients must be given priority over family accounts and accounts registered in the name of Upsala itself C transactions for clients and then employers have priority over transactions in securities or other investments of which a member or candidate is the beneficial owner Jun least likely violated CFA Institute Standards of Professional Conduct with his: A use of the business card B statement about charterholders C statement about passing exams By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates Candidates may view and print the exam for personal exam preparation only The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose When accepting the part-time consulting position, does Jun most likely violate any CFA Institute Standards? A No, because he does not need consent B Yes, because he does not provide adequate disclosure to Upsala C Yes, because the work requirements will interfere with his duties to Upsala By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates Candidates may view and print the exam for personal exam preparation only The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose Questions through 12 relate to Quantitative Methods Jacques Nordique Case Scenario Jacques Nordique is a quantitative analyst at Brimford Investment Management One of the firm’s managing partners asks Nordique to collect and analyze data as part of a project to explain and to forecast the behavior of price/earnings (P/E) ratios Nordique wants to examine timeseries models of P/E behavior and begins by collecting 15 years of monthly data on market P/E ratios After considering several different time-series models, Nordique estimates a regression equation of the form: (P/E) = + (P/E) t–1 + Equation ε and obtains the results shown in Exhibit Nordique believes the time series is mean reverting and given the estimated coefficients, he calculates the mean-reverting level of the market P/E ratio to be 13.3 Exhibit Regression Results Dependent Variable is the Market Price/Earnings (P/E) Ratio Regression Statistics R-squared 0.959 F-statistic 4160.885 Standard Error of Estimate 0.988 Number of Observations 179 Durbin-Watson Statistic 2.115 Intercept (P/E) t–1 Coefficients 0.332 0.975 Standard Error 0.189 0.015 Nordique shares his time-series results with his supervisor, Amy Beloit She is interested in the implications for stock-bond allocation, especially given that Brimford’s investment strategists are neutral on the future direction of interest rates After reviewing the results, Beloit has two concerns about the time series estimated in Exhibit 1: (1) the error terms exhibit heteroskedasticity; and (2) does the time series exhibit a unit root? Exhibit contains critical values of several test statistics that may be relevant to the results that Nordique and Beloit are interpreting By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates Candidates may view and print the exam for personal exam preparation only The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose Degrees of freedom 120+ Exhibit Critical Values of Selected Test Statistics t-statistic Durbin-Watson Statistic One-tailed Probabilities α = 0.05, K = p = 0.05 p = 0.025 = 1.65 = 1.69 2.92 4.30 1.66 1.98 Nordique’s most appropriate action to determine if Equation correctly fits the time series is to examine the: A R-squared value and F-statistic B autocorrelation between the error terms C correlation between the squared error terms and the independent variable To determine whether Beloit’s first concern is valid, Nordique’s most appropriate action would be to: A perform the Dickey-Fuller test B regress the squared residuals from Equation on the squared residuals lagged one period C test whether the variance of the error in one period depends on the variance of the error in successive time periods Which of the following models is most appropriate to determine if Beloit’s second concern is justified? A (P/E) t – (P/E) t–1 = + (P/E) t–1 + B (P/E) t – (P/E) t–1 = + [(P/E) t – (P/E) t–1 ] + C (P/E) t – (P/E) t–1 = + [(P/E) t–1 – (P/E) t–2 ] + ε ε ε By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates Candidates may view and print the exam for personal exam preparation only The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose 10 If Beloit’s second concern about the time-series results in Exhibit is correct, Nordique’s most appropriate action is to: A nothing B re-estimate the regression using the form: (P/E) = + (P/E) t-1 + (P/E) t-2 + C re-estimate the regression using the form: [(P/E) – (P/E) t-1 ] = + [(P/E) t-1 – (P/E) t-2 ] + ε ε 11 If Nordique’s belief about the behavior of the time series is correct, which of the following is most appropriate? A Underweight stocks if the P/E is above its historical average B Overweight stocks if the P/E is above its mean reversion level C Underweight stocks if the P/E is above its mean reversion level 12 If Nordique’s model is correctly specified, and the market P/E ratio is 22.50 in June 2008, the estimate of the market P/E ratio for August 2008 is closest to: A 21.39 B 22.04 C 22.27 By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates Candidates may view and print the exam for personal exam preparation only The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose Question 13 through 18 relate to Financial Statement Analysis Greg Fannerson (ACI) Case Scenario Greg Fannerson, CFA, is a financial analyst with Alchemy Consolidated Industries, Inc (ACI) ACI is a U.S corporation involved in several industry sectors and, in addition, has a significant portfolio of intercorporate investments ACI follows U.S GAAP when preparing its financial statements Fannerson’s supervisor, Charles Wilmington, has requested that Fannerson provide an update on ACI’s existing equity investments Fannerson has developed Exhibit 1, containing information about the companies Exhibit ACI Inc Portfolio A Equity Investments (amounts in millions) Investees’ Market Total Cost Value Reported Dividends Ownership Investment Basis 31 Net Paid by Percentage ($U.S.) December Income Investees in 2008 2008 2008 Columbus 60 percent $200 $200 $65 $10.0 Inc De Soto 33 percent $125 Not $90 $15.0 Inc applicable Le Vaca 30 percent $0 $2 ($50) Inc Marco Inc 25 percent $75 $65 $60 $12 Viking Inc percent $20 $40 $80 $10 Dividends Received by ACI in 2008 $6.0 $5.0 $3.0 $0.5 In addition to the equity investments in Exhibit 1, Fannerson was asked to evaluate two recently acquired debt holdings, which have been classified as held-to-maturity Information about these securities is shown in Exhibit Investment Cortez Inc Da Gama Inc Exhibit ACI Inc Portfolio B Debt Securities (amounts in millions) Cost Basis Market Value (Purchased at Par Value) 31 December 2008 $50 $46 $35 $30 Interest Received by ACI in 2008 $3 $2 By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates Candidates may view and print the exam for personal exam preparation only The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose Wilmington mentions that the economic circumstances regarding the two debt securities has deteriorated significantly and asked Fannerson’s opinion on how the way in which these securities had been classified affected ACI’s performance Fannerson has gathered the following additional information: • • • • • • At time of purchase the market value of the net assets of Columbus were equal to their book values The number of seats that ACI holds on the respective Boards of its’ equity investments is shown in Exhibit De Soto is a joint venture between ACI and two other partners Marco has a majority holder that exercises control over Marco’s operations ACI has been unhappy with the performance of the Le Vaca investment for some time and has been attempting to divest its holding with no success ACI does not classify equity securities as held-for-trading securities Exhibit Seats on the Board held by ACI in its Investee Companies Company Total Number Seats controlled of Directors by ACI Columbus 12 De Soto Marco 16 Le Vaca 12 Viking 15 13 The incremental effect on ACI’s net income ($ millions) from its investment in Columbus is closest to: A 39 B 45 C 65 By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates Candidates may view and print the exam for personal exam preparation only The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose ... August 20 08 is closest to: A 21 .39 B 22 .04 C 22 .27 By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates Candidates... for 20 08 will be closest to: A 27 .2% B 30.0% C 32. 7% By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates Candidates... accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates Candidates may view and print the exam for personal exam preparation