Questions Answered Incorrectly

Question: Which of the following is a component of the Code of Ethics?

• A) Practice and encourage others to practice in a professional and ethical manner that will reflect credit on members and their profession ✓ Correct Answer
• B) Members and candidates must not engage in conduct that compromises the integrity of the CFA designation or the security of the CFA examinations ✗ Your Answer
• C) Transactions for clients and employers have priority over transactions in which a member or candidate is the beneficial owner

Question: All of the following are components of the Code of Ethics EXCEPT:

• A) demonstrating diligence, independence, and thoroughness when preparing investment reports ✓ Correct Answer
• B) using reasonable care and exercising independent professional judgment ✗ Your Answer
• C) striving to maintain and improve their competence and the competence of others in the profession

Question: The CFA Institute Code of Ethics least likely requires a Member or Candidate to:

• A) Practice and encourage others to practice in a professional and ethical manner that will reflect credit on members and their profession ✓ Correct Answer
• B) Strive to maintain and improve the competence of others in the profession ✗ Your Answer
• C) Understand and comply with all applicable laws, rules, and regulations

Question: Which of the following is least likely to be a reason for imposing a suspension on a member or candidate?

• A) Discussing a question from the CFA exams on social media
• B) Failing to return the annual professional conduct statement ✓ Correct Answer ✗ Your Answer
• C) Misdemeanor charge for possession of narcotics

Question: According to the Code of Ethics, when practicing in a professional and ethical manner the goal is to:

• A) resolve conflicts between clients and employers
• B) reflect credit on members and the profession ✓ Correct Answer ✗ Your Answer
• C) increase membership in CFA Institute

Question: According to the Code of Ethics, a member reflects credit on the profession when a member:

• A) practices in a professional and ethical manner ✓ Correct Answer
• B) consults with other members on a regular basis ✗ Your Answer
• C) places the clients first

Question: The CFA Institute Code of Ethics specifies that CFA Institute Members and Candidates must do all of the following EXCEPT:

• A) use reasonable care and exercise independent professional judgment when engaging in professional activities ✗ Your Answer
• B) refrain from any conduct that compromises the reputation or integrity of the CFA designation ✓ Correct Answer
• C) act with integrity, competence, diligence, respect, and in an ethical manner

Question: Which of the following is least likely a component of the Code of Ethics? In dealing with the public, clients, prospects, employers, employees, and fellow members, CFA Institute members shall act with:

• A) respect ✓ Correct Answer
• B) integrity ✗ Your Answer
• C) humility

Question: Which of the following is least likely part of the CFA Institute Code of Ethics?

• A) Independent judgment ✗ Your Answer
• B) Contractual provisions ✓ Correct Answer
• C) Competence

Question: According to the Standards of Professional Conduct, investment transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner. This concept is most directly addressed in:

• A) Standard I, Professionalism
• B) Standard V, Investment Analysis, Recommendations, and Actions ✓ Correct Answer
• C) Standard VI, Conflicts of Interest ✗ Your Answer

Question: In accordance with Standard III (

• A) Submit to clients, at least quarterly, itemized statements detailing all of the period’s transactions ✓ Correct Answer
• B) Vote all proxies on behalf of clients in a responsible manner
• C) Utilize client brokerage to the sole benefit of the client ✗ Your Answer

Question: Which of the following is a component of the Code of Ethics? CFA Institute members shall:

• A) use particular care in determining applicable fiduciary duty
• B) use reasonable care and exercise independent professional judgment ✓ Correct Answer
• C) not knowingly participate or assist in any violation of laws, rules, or regulations ✗ Your Answer

Question: The first component of the Code of Ethics does NOT explicitly say that a CFA Institute member will act in a certain manner with respect to which of the following groups?

• A) Prospective clients
• B) CFA Institute members and candidates in the CFA Program ✓ Correct Answer
• C) Colleagues ✗ Your Answer

Question: Denise Weaver, CFA, manages a mutual fund and several pension plans. When Weaver receives a proxy for stock held by the mutual fund, she gives it to Susan Griffith, her administrative assistant, to vote according to the recommendations of the company's management. When the proxy is for a stock held by one of the pension plans, she asks Griffith to send the proxy on to the pension fund's sponsor to vote. Weaver has:

• A) not violated the Standards with her policies on voting proxies ✓ Correct Answer
• B) violated the Standards by her policy on mutual fund proxies, but not her policy on pension fund proxies ✗ Your Answer
• C) violated the Standards by her policy on mutual fund and pension fund proxies

Question: Judy Gonzales is a portfolio manager with Brenly Capital and works on Johnson Company's account. Brenly has a policy against accepting gifts over $25 from clients. The Johnson portfolio has a fantastic year, and in appreciation, the pension fund manager sent Gonzales a rare bottle of wine. Gonzales should:

• A) return the bottle to the client explaining Brenly's policy ✓ Correct Answer
• B) present the bottle of wine to her supervisor ✗ Your Answer
• C) inform her supervisor in writing that she received additional compensation in the form of the wine

Question: While having a conversation with a prospective client, John Henry states that his performance across all of his past clients over the past five years was over 20%, which was 200 basis points higher than his benchmark. He tells the client that while the benchmark may rise or fall over time, his excess performance will remain consistent. Henry violated the Standards of Professional Conduct because:

• A) he cannot discuss performance without clearly stating that the composite does not conform to GIPS ✗ Your Answer
• B) the statement of excess performance is misleading with respect to its certainty ✓ Correct Answer
• C) he cannot discuss prospective future performance in any manner

Question: Under Standard IV(

• A) it is recommended that members deliver a copy of the Code and Standards to their employer ✓ Correct Answer
• B) members are required to deliver a copy of the Code and Standards to their employer
• C) members are encouraged to leave an employer that does not adopt the Code and Standards as part of its policies and procedures ✗ Your Answer

Question: Member compliance on issues relating to corporate governance or to soft dollars is primarily addressed by the Standard concerning:

• A) Disclosure of Referral Fees ✓ Correct Answer
• B) Disclosure of Conflicts to Clients and Prospects
• C) Loyalty, Prudence, and Care ✗ Your Answer

Question: The Securities and Exchange Board of India (SEBI) has just enacted a new stock-trading rule. SEBI will give brokers a 10-day grace period, during which violators of the rule will be immediately notified and given a chance to remedy their situation to comply with the new rule. If a CFA Institute member located in India or doing business in India unknowingly violates the rule and then remedies the situation within the 10-day grace period, has the member violated Standard I(A)?

• A) No, because the member remedied the situation ✗ Your Answer
• B) Yes, because the member did not maintain knowledge and know of the rule ✓ Correct Answer
• C) No, because the member unknowingly broke the rule

Question: According to the CFA Institute Standards of Professional Conduct, Standard I(A), Knowledge of the Law, members shall not knowingly participate or assist in any violations of laws, rules, or regulations. An analyst:

• A) must report all legal violations to the proper regulatory commission and is held responsible for participating in illegal acts when the law is evident to anyone knowing the law ✗ Your Answer
• B) is held responsible for participating in illegal acts when the law is evident to anyone knowing the law and is held responsible for violations by others when the analyst is unaware of the facts giving rise to the violation ✓ Correct Answer
• C) is held responsible for participating in illegal acts when the law is evident to anyone knowing the law and can participate in a violation by having knowledge of the violation and taking no action to stop it or disassociate from it

Question: If a CFA Institute member knows that a fellow member has violated the Code and Standards, according to Standard I(

• A) required to dissociate from the activity and strongly encouraged to report it ✓ Correct Answer
• B) strongly encouraged to dissociate from the activity
• C) required to report the activity ✗ Your Answer

Question: According to CFA Institute Standards of Professional Conduct, which of the following is least likely a compliance procedure for maintaining independence and objectivity in making investment recommendations or taking investment action?

• A) Maintain files to support investment recommendations ✓ Correct Answer
• B) Restrict special cost arrangements related to travel
• C) Create a restricted list so that the firm disseminates only factual information about a controversial company ✗ Your Answer

Question: Travis Brown is a partner in a money management firm. He recently attended a seminar and learned about a quantitative model presented by Dixon. Upon returning to his office, Brown began testing the model and making a few minor alterations. He showed the model to his partners who were impressed and decided to promote the model as proof of the firm's value added. In the firm's next newsletter, Brown included a discussion of the model, the results, and financial data on several stocks selected by the model. These factual data were taken from Standard and Poor's publication. According to the CFA Institute Standards of Professional Conduct, which of the following actions is Brown required to take?

• A) Brown must credit S&P, no need to credit Dixon ✓ Correct Answer
• B) Brown must credit both Dixon and S&P ✗ Your Answer
• C) Brown must credit Dixon, no need to credit S&P

Question: A government committee has concluded that investment company fees should be disclosed to clients each quarter and has proposed new legislation to require this. Currently, the legal requirement is to report such data annually. In compliance with current legal requirements, Dolphin Investments discloses its fees annually. Eugene Shin, CFA, Dolphin's compliance officer, learns of the proposed changes but does not convert Dolphin's reporting to a quarterly basis. Shin's decision not to act:

• A) constitutes professional misconduct as defined in the Code and Standards
• B) is a violation of his duty to employer as defined in the Code and Standards ✓ Correct Answer ✗ Your Answer
• C) is not a violation of the Code and Standards

Question: Rachel Young, CFA, is making preparations to start a competitive business before terminating her relationship with her employer, a large money management company. Young has used excerpts from research reports by others with only a slight change in wording without acknowledging the source. Which of these actions violate the Code and Standards?

• A) Only one of these actions ✓ Correct Answer
• B) Both of these actions
• C) Neither of these actions ✗ Your Answer

Question: An analyst has been writing research reports on a company for many years. As part of the analyst's continuing research efforts, the analyst allows the firm to fly him to the firm's headquarters and put him up in the guest quarters the company has for all corporate visitors. According to Standard I(B), Independence and Objectivity, this is:

• A) a violation no matter what the circumstances ✓ Correct Answer
• B) a violation if the headquarters are within reasonable driving distance from the analyst's home
• C) not a violation under any circumstances ✗ Your Answer

Question: A CFA Institute member conscientiously maintains records of changes in security regulations. The member notices that his colleagues do not, and does NOT say anything. Is this a violation of Standard I(A)?

• A) No, as long as the colleagues do not violate the new rules ✗ Your Answer
• B) Yes, and the member should disassociate from these colleagues ✓ Correct Answer
• C) Yes, because the member is bound by the Code of Ethics

Question: Mary White, CFA, sits on the board of directors of XYZ Manufacturing, Inc. She discovers that management has knowingly participated in an activity she knows is illegal. According to the CFA Institute Standards of Professional Conduct, White is least likely to be required to:

• A) seek legal advice to determine what actions should be taken ✗ Your Answer
• B) report the violation to the CFA Institute Professional Conduct Program ✓ Correct Answer
• C) disassociate herself from the activity

Question: To comply with the Standard on independence and objectivity, an analyst making investment recommendations:

• A) must use only his own research ✗ Your Answer
• B) may use outside research only after verifying its accuracy ✓ Correct Answer
• C)

Question: A CFA Institute member works for Secure Securities, Inc., and plays rugby on the firm's rugby team. Secure Securities' team recently played the team of a rival firm. During the game, a fight broke out and the CFA Institute member was the instigator, but no one was seriously hurt. Is this a violation of I(

• A) No, because a fight at a rugby game is not a professional activity ✓ Correct Answer
• B) Yes, because the member could have hurt someone in the fight ✗ Your Answer
• C) Yes, because the member is bound by the Code of Ethics

Question: CFA Institute believes:

• A) that a maximum level of professional responsibility and conduct dictates that members be aware of and comply with laws, rules, and regulations governing their conduct ✓ Correct Answer
• B) that a minimum level of professional responsibility and conduct dictates that members be aware of and comply with laws, rules, and regulations governing their conduct ✗ Your Answer
• C) that firms should comply with all domestic laws and regulations and that these laws also govern behavior in foreign markets, regardless of foreign laws and requirements

Question: Milton Baker, CFA, prepares a research report on the dynamics of a stock price. In his study, he uses a considerable number of information sources, both outside sources and his company's own research papers, prepared for both internal and public use. The report will first be distributed at the monthly department meeting and then later will be published on the company's Internet site. He thinks that he may have neglected to mention some of his sources in his reference list but decides that he needs to be concerned about full disclosure of his sources only for the public version of the report, so he will wait to revise his work until after the monthly meeting but before it is published on the internet site. Which Standards does Baker NOT comply with?

• A) Standard I(C), Misrepresentation, only ✓ Correct Answer ✗ Your Answer
• B) Standard I(C), Misrepresentation, I(B), Independence and Objectivity, and I(A), Knowledge of the Law
• C) Standard I(C), Misrepresentation, and I(A), Knowledge of the Law

Question: Regarding Myers' references of her status as a candidate in the CFA program, what Standard governs these actions and is she in compliance?

• A) Standard VII: Responsibilities as a CFA Member or CFA Candidate. Compliance: No
• B) Standard I: Professionalism. Compliance: No ✓ Correct Answer
• C) Standard III: Duties to Clients. Compliance: No ✗ Your Answer

Question: All of the following most likely apply to Myers' participation as a partner in the software company EXCEPT:

• A) - Disclosure of Conflicts ✓ Correct Answer
• B) Standard VI( ✗ Your Answer
• C) Standard III(E) - Preservation of Confidentiality

Question: The mosaic theory is the idea that an analyst can:

• A) base his recommendations on nonpublic material information only for the clients of the company, but not for the general public ✓ Correct Answer
• B) make recommendations or trade based on several pieces of public or nonpublic information, each piece by itself being nonmaterial, but when compiled the information becomes material
• C) make investment recommendations on the basis of several pieces of nonpublic information as long as the aggregate information remains nonmaterial ✗ Your Answer

Question: Lynne Jennings is a chemical industry research analyst for a large brokerage company. That industry is currently seeing an increase in mergers and acquisitions. While flying through Chicago, Jennings sees several senior officers who she knows are from the largest and fourth largest chemical companies walk into a conference room. She concludes that negotiations for an acquisition might be taking place. Jennings:

• A) may use this information to support an investment recommendation ✓ Correct Answer
• B) should inform her compliance officer that she has material nonpublic information on firms she covers
• C) may not act or cause others to act on this information ✗ Your Answer

Question: Paul Clark, CFA, has just learned from a financial analyst at Corvac Industries that orders for their core products are running ahead of last year's orders by 15%, information that has not been publicly disclosed by the company. Clark currently has a hold rating on Corvac based on his expectation of a 5% increase in revenues for the current year. Based on Standard II(

• A) encourage Corvac to publicly release the order information and not act on that information until it is publicly disclosed ✓ Correct Answer
• B) disclose the information publicly prior to making any changes in his recommendation
• C) put Corvac on his firm’s restricted list and not make a recommendation until the increase in orders is publicly disclosed ✗ Your Answer

Question: Regarding non-public information, which one of the following statements is NOT correct?

• A) A member can be summarily suspended for having received material non-public information
• B) An analyst may use some types of non-public information ✓ Correct Answer ✗ Your Answer
• C) Disclosing material non-public information would have an impact on the price of a security or be of interest to a reasonable investor

Question: A brokerage firm has a trading department and an investment-banking department. Often the investment-banking department receives material non-public information that would be valuable in advising the firm's brokerage clients. In order to comply with the Standards, the firm:

• A) should restrict employee trading in securities for which the firm is in possession of material non-public information ✓ Correct Answer
• B) should record the exchange of information between the investment-banking department and the brokerage department ✗ Your Answer
• C) must divest one of the departments

Question: Alan Cramer, CFA, practices in a country that does not regulate the investment of company retirement plans. He was retained by Bingham Companies to manage their corporate pension plan. Bingham's management has approached Cramer and requested that Cramer invest the entire plan in Bingham stock. Cramer may:

• A) invest a portion of the retirement plan in Bingham Company stock if the investment is prudent and if he keeps the overall portfolio properly diversified ✓ Correct Answer
• B) invest all of the retirement plan assets in Bingham Company stock according to management's request only if Cramer can document that the investment is more prudent than any other investment opportunity he finds ✗ Your Answer
• C) not invest any of Bingham Company's retirement plan in its own stock regardless of the stock's prospects and in spite of management's request

Question: Paul Salyer, a portfolio manager, is making a presentation to a prospective client. Paul says that as a new portfolio manager, he made an average annual rate of return of 50% in the last two years at his previous firm and that based on this, he can guarantee a 50% return to the client. Which of the following statements is in accordance with Standard III(D), Performance Presentation?

• A) Stating his past performance as long as it is fact
• B) Implying that he can guarantee a return ✓ Correct Answer ✗ Your Answer
• C) Imputing his past performance to future performance

Question: Lance Tuipulotu, CFA, manages investments for 400 individuals and families and often finds his resources stretched. When his largest investors petition him to include a 5% to 7% allocation of non-investment-grade bonds in their portfolios, he decides he needs additional help to meet the request. He considers various subadvisers who specialize in that asset class. To have a reasonable basis for selecting a subadviser, criteria that Tuipulotu should use should least likely include:

• A) their internal controls ✓ Correct Answer
• B) consistently high historical returns
• C) adherence to their stated strategies ✗ Your Answer

Question: Which of the following would be the least important proxy issue?

• A) Takeover defense and related actions
• B) Election of internal auditors ✓ Correct Answer
• C) Compensation plans for officers ✗ Your Answer

Question: When a firm seeks to allocate a disproportionate number of shares of a hot IPO to performance-based fee accounts this constitutes a violation of the Standard concerning:

• A) fiduciary duty ✓ Correct Answer
• B) priority of transactions
• C) additional compensation arrangements ✗ Your Answer

Question: In securing the shares for all accounts under her management, Linda Kammel of Northwest Futures purchased three blocks of shares at three different prices. She then allocated these shares by placing shares from the first block in accounts with surnames beginning with A-G. The second was allocated over accounts H-P, and the third over Q-Z. This action is:

• A) permissible only if the clients are informed of the allocation procedure ✓ Correct Answer
• B) not permissible under the Code and Standards
• C) consistent with her responsibilities under the Code and Standards ✗ Your Answer

Question: Greg Stiles, CFA, may withhold from CFA Institute information about a client acquired in the regular performance of his duties:

• A) for neither of the reasons listed ✓ Correct Answer
• B) only if Stiles is a relative of the client
• C) only if Stiles has a special confidentiality agreement with the client ✗ Your Answer

Question: Which of the following is least accurate regarding the promotional announcement of Patel passing the Level III exam?

• A) The promotional announcement violates the restrictions on misrepresenting the meaning of the CFA designation ✓ Correct Answer
• B) The promotional announcement assumes that passing of the Level III examination of the CFA program allows one to use the CFA designation
• C) The announcement violates the Code of Ethics because it implies that obtaining a CFA charter leads to superior performance ✗ Your Answer

Question: With respect to the choice of broker, did Patel violate any CFA Institute Standards of Professional Conduct?

• A) Yes, since Patel is obligated to seek the best possible price and execution for all clients ✓ Correct Answer
• B) Yes, since Patel failed to properly notify Singh that using TradeRight would lead to higher commissions and opportunity costs
• C) No ✗ Your Answer

Question: Perley & Sons is an investment advisor company that just signed a contract with full discretionary power for the management of assets for Bright Future, a charitable fund. Without consultation, portfolio manager Martin Brown, CFA, decides to trade the funds' assets through a brokerage firm that provides, as an additional benefit, research reports for companies in the microchip industry. These companies represent the main investment interest for most of the Perley & Sons clients. The Bright Future portfolio does not hold any equities in the microchip industry, and, because of its risk profile, is unlikely to ever do so. Which of the following activities represents a possible breach with the CFA Institute standards?

• A) Lack of action in consulting with the client before choosing the brokerage firm ✓ Correct Answer
• B) Accepting research reports from the brokerage firm that do not benefit client portfolios ✗ Your Answer
• C) Exercising a selection principle that does not comply with the idea of best trade price and execution

Question: Ed Staples, CFA, manages a pension fund sponsored by Hill Corporation. The Code and Standards most likely require Staples to:

• A) act solely in the interest of the ultimate beneficiaries ✓ Correct Answer
• B) support the sponsor's management during proxy fights ✗ Your Answer
• C) base investment decisions on each beneficiary’s return requirements and risk tolerance

Question: After changing her recommendation on Aggregate, Sanders:

• A) violated Standard VI(B): Priority of Transactions by trading Aggregate from her own account
• B) violated Standard II(A): Material Nonpublic Information by taking investment action based on information not accessible to the public ✓ Correct Answer
• C) did not violate Standard II(A): Material Nonpublic Information because the information was disclosed to a select group of analysts ✗ Your Answer

Question: In selling his fund's stake in Aggregate, Martinez:

• A) violated Standard III(A): Loyalty, Prudence, and Care by using information obtained from Watkins
• B) violated no standards ✓ Correct Answer
• C) violated Standard II(A): Material Nonpublic Information by using information obtained from Watkins ✗ Your Answer

Question: Marc Feldman, CFA, is manager of corporate investor relations for a high-tech startup, zippy.com, in Boise, Idaho. Feldman is well-known in the high tech community in Boise, and Dragon.com has asked if he will help them organize their investor relations function on a consulting basis. They offer him an all-expenses-paid two-week holiday for two on Australia's Gold Coast in payment. Regarding this offer as a CFA Institute member Feldman is:

• A) not allowed to accept such an offer since it effectively places him in competition with his employer
• B) allowed to accept the offer only with written approval from zippy and from Dragon ✓ Correct Answer
• C) allowed to accept the offer only with written approval from zippy ✗ Your Answer

Question: Regarding the Paris trip, Lindquist:

• A) cannot accept the gift under any circumstances ✓ Correct Answer
• B) cannot accept the gift without disclosing it to his employer
• C) can accept the gift if he determines, in consultation with his employer, that accepting the gift would not compromise his objectivity ✗ Your Answer

Question: With regard to the Chandler portfolio, Lindquist violated:

• A) Standard III(A): Loyalty, Prudence, and Care, but not Standard I(D): Misconduct ✓ Correct Answer
• B) neither Standard III(C): Suitability, nor Standard III(A): Loyalty, Prudence, and Care
• C) Standard III(C): Suitability, but not Standard III(A): Loyalty, Prudence, and Care ✗ Your Answer

Question: Which of the following standards is most likely violated in Lindquist's use of his experimental version of the Midwestern model?

• A) Standard I(C): Misrepresentation (plagiarism)
• B) Standard V(A): Diligence and Reasonable Basis ✓ Correct Answer ✗ Your Answer
• C) Standard IV(C): Responsibilities of Supervisors

Question: Lindquist's actions in advertising his investment performance:

• A) conform to standards concerning performance presentation as long as Lindquist does not claim compliance with CFA Institute Global Investment Performance Standards
• B) violate Standard III(D): Performance Presentation ✓ Correct Answer ✗ Your Answer
• C) conform to all standards

Question: Regarding the NCAA tickets, what action must Lindquist take to avoid a violation of Standard I(B): Independence and Objectivity?

• A) Informing his employer is sufficient ✓ Correct Answer
• B) Obtain written consent from all parties involved ✗ Your Answer
• C)

Question: Fernando Abrea, CFA was an analyst for Pacific Investments. In October he left Pacific and joined Global Securities as manager of a local office. Abrea's change of employment came about in the following manner: In April, Abrea contacted Global about a possible position he saw advertised in a financial publication and had exploratory meetings with Global. In July, Abrea submitted a strategic plan to Global and signed an agreement to join Global. He then contracted for office space on behalf of Global. On October 15, Abrea's resignation from Pacific became effective. He did not take any client lists from Pacific. On October 16, Abrea mailed a letter that explained his new undertaking with Global to prospective clients, including his former clients at Pacific. With respect to Standard IV(

• A) violated the Standard by contacting his former clients at Pacific ✓ Correct Answer ✗ Your Answer
• B) did not violate the Standard
• C) violated the Standard by contracting for office space on behalf of Global

Question: An analyst working at an investment firm has a client that rents limousines. The client tells the analyst that as long as he is the client's analyst, he can have free use of a limousine several times a year. The analyst needs to:

• A) do nothing since the offer is not linked to the performance of the client's portfolio ✓ Correct Answer
• B) explicitly refuse such an offer ✗ Your Answer
• C) inform his supervisor in writing of the offer if the analyst intends to accept the offer

Question: Bill Fence, CFA, supervises a group of research analysts, none of whom have earned the CFA designation (nor are they CFA candidates). On several occasions he has attempted to get his firm to adopt a compliance system to ensure that applicable laws and regulations are followed. However, the firm's principals have never adopted his recommendations. Fence should most appropriately:

• A) refuse supervisory responsibility ✓ Correct Answer
• B) take no further action, because by encouraging his firm to adopt a compliance system he has fulfilled his obligations under the Code and Standards ✗ Your Answer
• C) report the inadequacy by submitting a complaint in writing to the CFA Institute Professional Conduct Program

Question: Brian Bellow, CFA, is a portfolio manager for Progressive Trust Company. Several friends have asked Bellow to review their investment portfolios. On his own time, Bellow examines their portfolios and makes several recommendations. He accepts no compensation from his friends for his investment advice. According to CFA Institute Standards of Professional Conduct, did Bellow violate his duty to Progressive Trust?

• A) No, because Bellow received no compensation for his services ✓ Correct Answer
• B) Yes, because Bellow did not attempt to solicit his friends to become clients of his employer
• C) No, because Bellow provided no ongoing investment advice ✗ Your Answer

Question: Which of the following statements is most accurate about the Standard concerning the responsibilities of supervisors?

• A) If a subordinate violates a securities law, her supervisor is in violation of the Standard ✓ Correct Answer
• B) If a supervisor makes a reasonable effort to detect violations, but fails to detect a violation that occurs, she has violated the Standard
• C) If a supervisor does not make a reasonable effort to detect violations, she is in violation of the Standard even if no violations by her subordinates have occurred ✗ Your Answer

Question: Pamela Gee is a portfolio manager. She is planning to establish her own money management firm. She has already informed her employer, Branford, Inc., about her plans. In her remaining time at Branford, she may:

• A) solicit Branford colleagues but not Branford clients ✗ Your Answer
• B) inform her current clients about her resignation and let them know how to reach her
• C) start the registration of her new company ✓ Correct Answer

Question: Bill Valley has been working for Advisors, Inc., for several years, and he just joined CFA Institute. Valley's sister just received a large bonus in the form of stock options in Zephyr, Inc. Valley's sister knows nothing about financial assets and offers Valley a week at her holiday home each year in exchange for Valley monitoring Zephyr and the value of her stock options. In order to comply with the Code and Standards, Valley needs to inform Advisors of:

• A) nothing since no money is involved and it is a favor for a family member ✗ Your Answer
• B) the compensation in the form of the use of the holiday home only ✓ Correct Answer
• C) both the use of the holiday home and his sister's options

Question: John Hill, CFA, has been working for Advisors, Inc., for eight years. Hill is about to start his own money management business and has given his two weeks' notice of his resignation from Advisors. A few days before his resignation takes effect, Rod Bright, a former client of Advisors, calls Hill at his home about his new firm. Bright says that he is very happy that Hill is leaving Advisors because now he and Hill can resume a professional relationship. Bright says that he would never become a client of Advisors again. Hill promises to call Bright back after he has left Advisors but takes no further action. Hill does not tell Advisors about the call. Hill has most likely:

• A) violated the Standard concerning loyalty to employer ✓ Correct Answer ✗ Your Answer
• B) not violated the Standards
• C)

Question: According to the CFA Institute's Standards of Professional Conduct, Fleming's execution of Waverly's trade order after confirming the appropriateness of the trade is most likely in violation of:

• A) Standard I(C)—Misrepresentation for not disclosing to Waverly that he did not read the marketing materials, but is not in violation of Standard III(C)—Suitability because the client analyzed the investment thoroughly ✗ Your Answer
• B) Standard V(B)—Communication with Clients and Prospective Clients for not separating fact from opinion, but is not in violation of Standard I(C )— Misrepresentation because his guarantee of future investment performance was not a written representation
• C)

Question: Randal Brooks is the chief economist for a large brokerage firm. In the aftermath of a national tragedy, Brooks feels that it is very possible that the stock market will drop significantly and not recover for several years. However, he does not believe that this is the most likely scenario but merely that the risk of investing in equities has increased. He decides to write a market commentary to the brokerage clients that discusses the reasons why the market will remain stable and talks about why he, as a private citizen, feels patriotic. He does not mention the increase risk in equities. Brooks has:

• A) violated the Standards by not including all of the relevant factors in the research report, but not by making patriotic statements ✓ Correct Answer
• B) violated the Standards by not including all of the relevant factors in the research report and making patriotic statements ✗ Your Answer
• C) not violated the Standards

Question: Wes Smith, CFA, works for Advisors, Inc. In order to remain in compliance with Standard V(A), Diligence and Reasonable Basis, Smith may recommend a security in which of the following situations?

• A) For either of the reasons listed here
• B) Smith reads a favorable review of the security in a widely read periodical ✓ Correct Answer ✗ Your Answer
• C) Advisors' research department recommends a stock. Lon Smith is an analyst in the Research Department of Lincoln & Co., a large investment bank. Smith has just completed a temporary assignment in Lincoln's Corporate Finance Department related to underwriting a debt offering for FinSoft, a computer software

Question: Using as his universe all companies in the steel industry, Reynold Anderson analyses the performance of stock prices for the industry. He succeeds in developing a regression model with excellent statistical control measures. The extrapolation from the model shows low risk variance of the securities in this industry. Without the inclusion of non-steel stocks in the portfolio, Anderson concludes that, based on these results, every portfolio can use the steel industry securities to diversify and lower its risk. He persuades his clients to change their current portfolios. Anderson states that, as the model's results show, some particular industries, such as car manufacturers, have underpriced stocks, and investors should take advantage of it. Anderson has violated the Standards because he:

• A) is not clear enough about the model results
• B) does not distinguish the opinion, based on his model, from the fact ✓ Correct Answer
• C) does not consider the suitability of the investment ✗ Your Answer

Question: A manager of pooled funds must do all of the following to remain in compliance with the Standards EXCEPT:

• A) seek authorization for any proposed changes ✓ Correct Answer
• B) seek authorization for any trade that involves more than 1 percent of the fund's assets
• C) disclose portfolio construction processes ✗ Your Answer

Question: An analyst receives a report from his research department that summarizes and interprets a recent speech from the chairman of the U.S. Federal Reserve. The summary says that the chairman thinks inflation is under control. Based upon this summary, the analyst says in his next newsletter that inflation is under control. This is a violation of:

• A) none of the Standards listed here ✓ Correct Answer
• B) Standard V(A), Diligence and Reasonable Basis, only
• C) Standard V(A), Diligence and Reasonable Basis, and Standard V(B), Communication with Clients and Prospective Clients ✗ Your Answer

Question: With regard to Ferrazzo's purchase of Bradley stock, she violated:

• A) Standard III(E): Preservation of Confidentiality, but not Standard V(A): Diligence and Reasonable Basis ✗ Your Answer
• B) Standard V(A): Diligence and Reasonable Basis, but not Standard II(A): Material Nonpublic Information ✓ Correct Answer
• C) Standard III(E): Preservation of Confidentiality and Standard II(A): Material Nonpublic Information

Question: Regarding the high-tech stock model, which of the following actions is least likely to help Sandro avoid violating the standards regarding plagiarism and research reports?

• A) Acknowledging Wright’s development of the initial model ✓ Correct Answer ✗ Your Answer
• B)
• C) Providing basic information about technology stocks in the research report.

Question: The production of the advertising represented a violation of:

• A) Standard IV(A): Loyalty to Employer and Standard I(C): Misrepresentation ✓ Correct Answer
• B) Standard IV(C):Responsibilities of Supervisors, but not Standard VII(B): Reference to CFA Institute, the CFA Designation, and the CFA Program ✗ Your Answer
• C) Standard VII(B): Reference to CFA Institute, the CFA Designation, and the CFA Program, and Standard I(C): Misrepresentation

Question: Ferrazzo may use which of the following brokers?

• A) Blue and Green only
• B) White and Blue only ✓ Correct Answer ✗ Your Answer
• C) Blue only

Question: Which of the following statements regarding Alpha Co. is least accurate?

• A) Sandro has breached a fiduciary duty to her client
• B) The fair-dealing standard has not been violated ✓ Correct Answer ✗ Your Answer
• C) Both Wilson and Sandro have a reasonable basis for their recommendations

Question: An analyst has several groups of clients who are categorized according to their specific needs. Compared to research reports distributed to all of the clients, reports for a specific group:

• A) are not permitted by the Code and Standards ✗ Your Answer
• B) are required to include more basic facts ✓ Correct Answer
• C) may generally exclude more basic facts

Question: An analyst has constructed an investment policy statement (IPS) and a portfolio for a new client, Stephanie Sasser. He has also provided written guidelines on the processes used to make investment management decisions. Six month later, Sasser questions the analyst about several portfolio holdings. Due to a large allocation in financial services stocks during a severe market downturn, her portfolio has underperformed the benchmark by a large margin. Although the analyst remembers discussing the over-allocation with Sasser, and receiving her approval, he is unable to find supporting documents. Which of the following Standards has the analyst most likely violated?

• A) Diligence and Reasonable Basis ✗ Your Answer
• B) Communications with Clients and Prospective Clients ✓ Correct Answer
• C) Record Retention

Question: The Konkol Company implements a new methodology for portfolio valuation that is licensed to them by ABC Statistics. To comply with the Code and standards, Konkol should:

• A) discuss the new methodology only with clients whose security selection process will change as a result ✗ Your Answer
• B) discuss the new methodology with its clients ✓ Correct Answer
• C) not discuss the new methodology with clients because doing so would fail to preserve ABC’s confidentiality

Question: Victor Logan is a portfolio manager for McCoy Advisors, and Jack Brisco is the Director of Research for McCoy. Brisco has developed a proprietary model that has been thoroughly researched and is known throughout the industry as the McCoy model. The model is purely quantitative and screens stocks into buy, hold, and sell categories. The basic philosophy of the model is thoroughly explained to clients. Brisco frequently alters the model based on rigorous research—an aspect that is well explained to clients, although the specific alterations are not continually disclosed. Portfolio managers then make specific sector and security holding decisions, purchasing only securities that are indicated as "buys" by the model. Logan has conducted very thorough research on his own, using the same process that Brisco uses to validate his findings. Logan feels the model is missing some key elements that would further reduce the list of acceptable securities to purchase, however, Brisco has refused to look at Logan's research. Frustrated by this, Logan applies his own version of the model, with the justification that he is still only purchasing securities on the buy list. Because of the conflict with Brisco, he does not disclose the use of the model to anyone at McCoy or to clients. Which of the following statements regarding Logan and Brisco is CORRECT? Logan is:

• A) not violating the Standards by applying his version of the model, but is violating the Standards by not disclosing it to clients. Brisco is not violating the Standards ✓ Correct Answer
• B) violating the Standards by applying his version of the model and by not disclosing it to clients. Brisco is violating the Standards by failing to consider Logan's research
• C) violating the Standards by applying his version of the model and by not disclosing it to clients. Brisco is not violating the Standards ✗ Your Answer

Question: All of the following statements in promotion of your services are in violation of CFA Institute Standards of Practice handbook EXCEPT:

• A) I guarantee under my management that you will receive returns in excess of the market index average ✗ Your Answer
• B) based upon my research, you will achieve a 20% compound annual rate of return on small cap stocks over the next 5 years
• C) I passed Level II of the CFA Program in 2003 ✓ Correct Answer

Question: Which of the following statements regarding disciplinary procedures is least accurate?

• A) A review panel is created from Disciplinary Review Committee members ✓ Correct Answer ✗ Your Answer
• B) If the CFA member or candidate rejects the sanction, the charges and sanctions may be reviewed
• C) The sanctions imposed by the Professional Conduct staff are final and conclusive

Question: Anderson, Baker and Chang all received their CFA charters and ordered new business cards. Their business cards are as follows: G. J. Anderson, CFA

• A) Baker and Chang ✗ Your Answer
• B) Anderson and Chang
• C)

Question: A CFA Institute member puts the following statement on her resume: "I passed each level of the CFA exam on the first try." Is this a violation of Standard VII(B)?

• A) No, because it is a statement of fact ✓ Correct Answer
• B) Yes, because saying she passed exams on the first try is not appropriate
• C) Yes, because she incorrectly refers to the CFA exam ✗ Your Answer

Question: Which of the following is least likely a violation of the Standard concerning conduct as participants in CFA Institute programs?

• A) Disregarding the rules related to the administration of the CFA examination ✓ Correct Answer
• B) Improperly using the CFA Designation to further professional goals
• C) Expressing opinions in disagreement with CFA Institute advocacy positions ✗ Your Answer

Question: Ralph Lim and Susan Bland have both passed Level I of the CFA Program. Both are currently enrolled to sit for Level II. Lim's business card reads, "Ralph Lim, CFA Level I." Bland's resume states, "Level II Candidate in the CFA Program." According to CFA Institute Standards of Professional Conduct involving use of the professional designation:

• A) Bland violated the Standard, but Lim did not ✓ Correct Answer
• B) Lim violated the Standard, but Bland did not
• C) Both Lim and Bland violated the Standard ✗ Your Answer

Question: Nancy Arnold receives an undergraduate business degree with a management major and has completed all the requirements for the CFA designation. She is applying for employment at several brokerage firms. Her resume states, "I will soon be awarded the CFA charter by CFA Institute." Her resume also states that she and majored in finance. Arnold's statements violate:

• A) only the Standard on misrepresentation
• B) both the Standards on misrepresentation and reference to the CFA designation ✓ Correct Answer
• C) only the Standard on reference to the CFA designation ✗ Your Answer

Question: John Johnson, portfolio manager at Sunshine Investments, has passed all three levels of the CFA® Program and has completed his work experience requirements. He expects to receive his charter in the near future. He includes the following statement in his firm's brochure: "Johnson has passed all three levels of the exam and has completed the required work experience for the CFA Charter. He is eligible for the CFA Charter and expects to receive the charter in the near future. Over the years, he has demonstrated a superior performance and his CFA Charter will be rightfully awarded." Johnson has:

• A) violated CFA Institute Standards of Professional Conduct because he implied superior performance that would be linked to the CFA Charter ✓ Correct Answer
• B) not violated CFA Institute Standards of Professional Conduct because he met all disclosure requirements
• C) violated CFA Institute Standards of Professional Conduct because he advertised the CFA Charter before actually obtaining it ✗ Your Answer

Question: A CFA charterholder coaches a fellow employee as that colleague studies for the CFA exams. The charterholder tells the colleague all that she remembers from her exams and how they were constructed. This is:

• A) not a violation of the standards ✗ Your Answer
• B) concerning use of the designation ✓ Correct Answer
• C) a violation of Standard VII(
• D) concerning professional misconduct

Question: For the past 5 years, Karen Beckworth, CFA, has served as a proctor for the CFA exam. Beckworth tells her assistant, a Level III CFA candidate, that she normally receives the examinations on the Thursday before the exam. Given the low pass rate at Level III, Beckworth asks her assistant if he would like an advance copy of the next exam. Beckworth's assistant declines the offer. Beckworth's assistant has been very vocal about expressing his opinions about the low pass rate. The assistant claims, "there are too many charterholders and CFA Institute is deliberately failing candidates because the prestige of the CFA charter is becoming diluted." With regard to Standard VII(

• A) Neither Beckworth nor her assistant is in violation of Standard VII(A) ✗ Your Answer
• B) Beckworth is in violation of Standard VII(A), but her assistant is not in violation ✓ Correct Answer
• C) Both Beckworth and her assistant are in violation of Standard VII(A)

Question: Ron Vasquez is registered to sit for the Level II CFA exam. Unfortunately, Vasquez has failed the exam the past two years. In his frustration, Vasquez posted the following comment on a popular internet bulletin board: "I believe that CFA Institute is intentionally limiting the number of charterholders in order to increase its cash flow by continuing to fail candidates. Just look at the pass rates." With regard to the Standards concerning misconduct and conduct as participants in CFA Institute programs, Vasquez is:

• A) not in violation of either Standard ✓ Correct Answer
• B) in violation of only one of these Standards ✗ Your Answer
• C) in violation of both of these Standards

Question: Which of the following statements is a violation of the Standards if it is included on a CFA charterholder's resume?

• A) Earning the CFA designation indicates my desire to maintain high ethical standards
• B) To earn the CFA designation I had to pass three rigorous examinations ✓ Correct Answer ✗ Your Answer
• C) Earning the CFA designation indicates my superior ability

Question: Claudel's statement about his education background is:

• A) truthful, but not in accord with the Code and Standards ✓ Correct Answer
• B) truthful, and in accord with the Code and Standards ✗ Your Answer
• C) not truthful, and not in accord with the Code and Standards

Question: Which of the following statements is CORRECT?

• A) Bonnet has violated Standard III(B): Fair Dealing, and Claudel has violated Standard I(B): Independence and Objectivity ✓ Correct Answer
• B) Bonnet has violated Standard II(A): Material Nonpublic Information, and Claudel has not violated Standard III(A): Loyalty, Prudence, and Care ✗ Your Answer
• C) Bonnet has violated Standard IV(A): Loyalty to Employer, and Claudel has violated Standard I(A): Knowledge of the Law

Question: Patricia Spraetz is the chief financial officer and compliance officer at Super Selection Investment Advisors. Super Selection is a medium-sized money management firm which has incorporated the CFA Institute Code of Ethics and Standards of Practice into the firm's compliance manual. Karen Jackson is a portfolio manager for Super Selection. She is not a CFA charterholder. Jackson is friendly with David James, president of AMD, a rapidly growing biotech company. James has provided Jackson with recommendations in the biotech industry, which she buys for her own portfolio before buying them for her clients. For three years, Jackson has also served on AMD's board of directors. She has received options and fees as compensation. Recently, the board of AMD decided to raise capital by voting to issue shares to the public. This was attractive to board members (including Jackson) who wanted to exercise their stock options and sell their shares to get cash. When the demand for initial public offerings (IPO) diminished, just before AMD's public offering, James asked Jackson to commit to a large purchase of the offering for her portfolios. Jackson had previously determined that AMD was a questionable investment but agreed to reconsider at James' request. Her reevaluation confirmed the stock to be overpriced, but she nevertheless decided to purchase AMD for her clients' portfolios. Which of the following statements concerning Super Selection is CORRECT?

• A) Spraetz, in her capacity as a supervisor, violated Standard IV( ✗ Your Answer
• B) Jackson did not violate the CFA Institute Code of Ethics and Standards since she is not a CFA charterholder ✓ Correct Answer
• C) by not preventing violations by Jackson

Question: Which of the following statements about O'Brien's use of convertible bonds is CORRECT?

• A) O’Brien’s lack of expertise in equity analysis, despite usage of the CFA mark, represents a violation of Standard VII(A): Conduct as Members and Candidates in the CFA Program ✓ Correct Answer
• B) The use of convertible bonds in O’Brien’s high-yield fund violates Standard V(A): Diligence and Reasonable Basis
• C) Unless O’Brien makes arrangements for someone else to vote the proxies, he is in violation of Standard III(A): Loyalty, Prudence, and Care ✗ Your Answer

Question: With regard to the Villa Real investment, O'Brien's actions:

• A) violate neither the reasonable-basis Standard nor the priority-of-transactions Standard
• B) violate the reasonable-basis Standard and the fiduciary-duties Standard ✓ Correct Answer
• C) do not violate the fiduciary-duties Standard but do violate the priority-of- transactions Standard ✗ Your Answer

Question: O'Brien's money-market allocations represent:

• A) reasonable actions, as they simply reflect the nature of his compensation
• B) a violation of Standard III(B): Fair Dealing ✓ Correct Answer
• C) a breach of his fiduciary duty to mutual-fund account owners ✗ Your Answer

Question: Assuming closing retained earnings for the year 20X8 was $110, the translation gain on the income statement would be:

• A) $17 ✓ Correct Answer
• B) $0 ✗ Your Answer
• C) $27

Question: The level of net fixed assets on the remeasured 20X8 balance sheet would be:

• A) $510 ✓ Correct Answer
• B) $462 ✗ Your Answer
• C) $480

Question: The level of retained earnings on the remeasured 20X8 balance sheet would be:

• A) $101 ✓ Correct Answer
• B) $85 ✗ Your Answer
• C) $305

Question: As compared to the local currency ratio, fixed asset turnover in the reporting currency would most likely be:

• A) higher ✓ Correct Answer
• B) lower ✗ Your Answer
• C) the same

Question: Which of the following ratios is affected by translation under the current rate method?

• A) Fixed asset turnover ratio ✓ Correct Answer
• B) Net profit margin ✗ Your Answer
• C) Debt/Assets ratio

Question: Which of the following general statements is most accurate with respect to the current rate method? Revenues:

• A) and operating expenses are translated at the average rate ✓ Correct Answer
• B) are translated at the average rate while operating expenses are translated at the current rate ✗ Your Answer
• C) and operating expenses are translated at the current rate

Question: Under the temporal method, the inventory and cost of goods sold (COGS) accounts are both nonmonetary accounts. Which of the following statements is least accurate regarding these accounts?

• A) If the firm accounts for inventory using last in, first out (LIFO), then the beginning-of- period rate is used to remeasure COGS ✓ Correct Answer
• B) The Inventory account is remeasured using the historical rate under both LIFO and FIFO ✗ Your Answer
• C) If the firm accounts for inventory using first in, first out (FIFO), then a more recent rate will be applied to the inventory account

Question: The Net Income of Grande, Inc., expressed in U.S. dollars for the year ended December 31, 2012, is closest to:

• A) $250,000 ✓ Correct Answer
• B) $550,000 ✗ Your Answer
• C) $500,000

Question: On APJ's 2005 income statement, the level of net income in U.S. dollars would be:

• A) $200.00 ✓ Correct Answer
• B) $240.00 ✗ Your Answer
• C) $300.00

Question: On APJ's 2005 balance sheet, the level of common stock (not including retained earnings) in U.S. dollars would be:

• A) $360 ✓ Correct Answer
• B) $288 ✗ Your Answer
• C) $240

Question: On APJ's 2005 balance sheet, the foreign currency translation adjustment in U.S. dollars would be:

• A) −$220 ✓ Correct Answer
• B) −$160 ✗ Your Answer
• C) −$280

Question: Regarding the different methods of consolidating foreign subsidiaries' operating results, it would be most accurate to state that:

• A) under the temporal method, monetary assets and monetary liabilities are translated at a historical exchange rate ✓ Correct Answer
• B) under the current rate method, revenues and expenses are translated at the exchange rate that existed when the underlying transaction occurred ✗ Your Answer
• C) under the current rate method, individual components of stockholder’s equity are translated at the current exchange rates. Navratov Corp. is a designer and manufacturer of high end sporting goods. The majority of the firm's business comes from Olympic athletes from Russia and the United States. On January 1, 2003, Navratov was purchased by a U.S. competitor, Evert Industries. Because Evert's business focuses on professional athletes in North America and Asia, Evert's management feels the acquisition of Navratov is a natural extension of their business and that buying the Russian firm should generate economies of scale. Peter Capriati is an analyst for Evert and has been assigned the task of integrating Navratov's financial statements into Evert's. Capriati knows that Evert's management pays a great deal of attention to making sure the firm's financial ratios are above the industry average. Because Navratov's sales are split evenly between the U.S. and Russia, management has given him the flexibility to designate the either the Ruble (Navratov's local currency) or the U.S. dollar (Evert's reporting currency) as Navratov's functional currency. As a result of choosing the functional currency, Capriati will use either the temporal or current

Question: What is Acer Tool & Die's cost of sales in U.S. dollars using the temporal method?

• A) $2,240.00 ✓ Correct Answer
• B) $2,222.00 ✗ Your Answer
• C) $2,242.00

Question: What is the remeasurement gain or loss for the period using the temporal method?

• A) $50 gain ✓ Correct Answer
• B) $32 loss ✗ Your Answer
• C) $52 loss

Question: Where does the currency translation gain or loss appear in the financial statements under the temporal method and the current rate method? Temporal method Current rate method

• A) Balance sheet Balance sheet ✗ Your Answer
• B) Income statement Balance sheet ✓ Correct Answer
• C) Balance sheet Income statement

Question: The U.S. Deter Company operates a subsidiary in the UK, and the functional currency is the British pound. The subsidiary's 2001 income statement shows GBP500 of net income and a GBP50 dividend that was paid on December 31, when the exchange rate was $1.50 per pound. The current exchange rate is $1.65 per pound, and the average rate is $1.58 per pound. What is the change in retained earnings for the period in U.S. dollars under U.S. GAAP?

• A) $750 ✓ Correct Answer
• B) $725 ✗ Your Answer
• C) $715

Question: Which of the following statements is least likely correct? Financial institutions differ from other companies:

• A) due to their activities giving rise to systemic risk ✓ Correct Answer
• B) due to their balance sheet containing assets that are often measured at fair value
• C) due to their assets being predominantly tangible ✗ Your Answer

Question: When using the fair value hierarchy as defined by IFRS and US GAAP, a financial asset valuation performed by discounting future cash-flows at a discount rate would most likely be classified as a:

• A) level 2 valuation ✓ Correct Answer
• B) level 3 valuation
• C) level 1 valuation ✗ Your Answer

Question: When assessing capital adequacy using risk-weighted assets, cash will most likely:

• A) not be included in risk-weighted assets ✓ Correct Answer
• B) be weighted at 100%
• C) be weighted over 100% ✗ Your Answer

Question: John Gittens is reviewing his firm's guidance for the application of the CAMELS framework and notices the following two statements: Statement 1: "The mission of a banking entity will affect the way its assets and liabilities are managed, and hence this qualitative impact is usually addressed within the management capabilities section of the CAMELS approach." Statement 2: "The corporate culture may lead to excessive risk taking, or even a high level of risk aversion, and this aspect is not covered in a typical CAMELS analysis." Regarding the two statements made by Gittens, statement 1 is most likely:

• A) correct and statement 2 is most likely correct ✓ Correct Answer ✗ Your Answer
• B) incorrect, and statement 2 is most likely correct
• C) incorrect and statement 2 is most likely incorrect

Question: Basel III regulation that aims to prevent banks from assuming so much leverage that they are unable to withstand loan losses is most correctly described as the:

• A) stable funding requirement ✗ Your Answer
• B) minimum liquidity requirement ✓ Correct Answer
• C) minimum capital requirement

Question: It would be least accurate to state that the Basel Committee:

• A) monitors adoption and implementation of standards in member jurisdictions ✗ Your Answer
• B) develops international regulatory framework for banks ✓ Correct Answer
• C) has legal authority to enforce compliance with supervision and accountability standards

Question: Which of the following statements comparing Property and Casualty insurers to Life and Health insurers is least likely correct?

• A) Life and Health insurers typically face more predictable claims than Property and Casualty insurers
• B) The calculation of Property and Casualty insurers minimum capital requirements is more likely to factor in exposure to interest rate risk ✓ Correct Answer
• C) Property and Casualty insurers typically require a higher equity cushion and hence can have higher capital requirements ✗ Your Answer

Question: Which of the following is least likely an indicator of biased measurement in assessing balance sheet quality?

• A) Overly high assumed discount rate for pension obligations
• B) Understatement of impairment charges for property, plant, and equipment ✓ Correct Answer ✗ Your Answer
• C) Company’s investment in debt securities of other companies, carried on the books at market value

Question: A manufacturing firm purchases equipment for use in its operations. With regard to recording the purchase using the cash basis versus the accrual basis of accounting, which of the following statements is most appropriate?

• A) With the cash basis, revenues and expenses relating to the equipment are generally recognized in the same period ✓ Correct Answer
• B) With the cash basis, revenues and expenses relating to the equipment are generally recognized in different periods ✗ Your Answer
• C) With the accrual basis, the cost of the equipment is allocated to the cash flow statements over the asset’s life

Question: Brent Jones, CFA is analyzing the financial statements of Imperial Resorts Inc. Jones wants to use the Beneish model to evaluate the probability of earnings manipulation. Jones makes the following statements: 1. Depreciation index of less than 1 would indicate that the company is depreciating assets at a higher rate than its peers. 2. Increases in Asset quality index indicate that the revenue recognition policies are conservative. Regarding the statements by Jones:

• A) Only statement 1 is correct ✓ Correct Answer ✗ Your Answer
• B) Only statement 2 is correct
• C) None of the statements is correct

Question: De Freitas Inc. (De Freitas) is a conglomerate. Its computer division was very profitable in the current year because it launched a successful new lightweight laptop computer. Prices in the automobile division have been rising over the years but it is engaged in a LIFO liquidation in the current year. Which of the following best describes the effect on the long-run earnings of the computer division and the automobile division compared to the most recent year? Computer division earnings Automobile division earnings

• A) Increase Decrease ✗ Your Answer
• B) Decrease Increase
• C) Decrease Decrease

Question: Mean reversion in earnings means that:

• A) Extreme high earnings will revert to the mean but extreme low earnings will not ✓ Correct Answer
• B) Extreme high as well as low levels of earnings will revert to the mean
• C) Extreme low earnings will revert to the mean but extreme high earnings will not ✗ Your Answer

Question: High-quality cash flow is least likely to be characterized by:

• A) No significant differences between operating cash flow and reported earnings
• B) Volatility of operating cash flow being lower than that of the firm’s peers ✓ Correct Answer
• C) Financing cash flows sufficient to cover capital expenditures, dividends and debt repayments ✗ Your Answer

Question: Asma Pharma has made several strategic investments in other pharmaceutical companies. In each instance, Asma has kept its stake just below 50% so it can account for the investment using the equity method of consolidation. Asma's balance sheet quality can be most accurately characterized as:

• A) High-quality due to compliance with local GAAP ✓ Correct Answer
• B) Low-quality due to lack of completeness
• C) Low-quality due to bias in measurement ✗ Your Answer

Question: High results quality is most likely demonstrated by:

• A) an adequate level of return that is sustainable ✓ Correct Answer
• B) high level of earnings determined conservatively ✗ Your Answer
• C) GAAP compliant financial reports that are decision useful

Question: Which of the following statements about cash flow is (are) CORRECT? Statement #1: The cash effects of decreasing accounts payable turnover are unlimited. Statement #2: The tax benefits from employee stock options can result in a significant source of investing cash flow. Statement #1 Statement #2

• A) Correct Incorrect ✓ Correct Answer
• B) Incorrect Correct ✗ Your Answer
• C) Incorrect Incorrect

Question: Which of the following statements about financial disclosures are correct or incorrect? Statement #1: Transitory earnings are usually more important to investors than permanent earnings. Statement #2: Pro-forma earnings are usually prepared in accordance with generally accepted accounting principles.

• A) Only statement #1 is incorrect ✓ Correct Answer
• B) Both are incorrect
• C) Only statement #2 is incorrect ✗ Your Answer

Question: Analyst Jane Kilgore is worried that some of Maxwell Research's accrual accounting practices will lead to excessive operating earnings recognition in the near-term. Examples of Kilgore's concerns include the following: Accelerated revenue recognition of service agreements. Classification of recurring revenue as nonrecurring revenue. Understated inventory obsolescence. Which of Kilgore's concerns is least likely to overstate current operating earnings?

• A) Accelerated revenue recognition of service agreements ✓ Correct Answer
• B) Understated inventory obsolescence
• C) Classification of recurring revenue as nonrecurring revenue ✗ Your Answer

Question: With regard to specific measures to analyze in detecting manipulation in the financial reporting process, which of the following statements is the least accurate?

• A) An increasing days’ inventory on hand (DOH) measure may be indicative of obsolete inventory ✓ Correct Answer
• B) A decreasing days’ sales outstanding (DSO) measure may be an indication of lower quality revenue
• C) Negative nonrecurring or non-operating items may be indicative of misclassifying an operating expense ✗ Your Answer

Question: Aggressive revenue recognition practices are least likely to increase:

• A) reported expenses
• B) reported ending inventory ✓ Correct Answer ✗ Your Answer
• C) reported assets

Question: Complete the following sentence. The cash component of income is ___________ than the accrual component.

• A) more persistent ✓ Correct Answer
• B) less persistent ✗ Your Answer
• C) the same persistence

Question: Which of the following items is least likely to involve the use of subjective measurement estimates by management?

• A) Use of straight-line depreciation method to depreciate tangible assets ✓ Correct Answer
• B) Use of FIFO (first in-first out) to cost inventories ✗ Your Answer
• C) Use of criteria to determine treatment as an extraordinary item

Question: Which of the following is least likely an indicator of biased measurement in assessing balance sheet quality?

• A) Understatement of valuation allowance for deferred tax assets
• B) Presence of substantial goodwill on balance sheet ✓ Correct Answer ✗ Your Answer
• C)

Question: Galaxy Company recognized a restructuring charge in its year-end income statement. Similar restructuring charges have occurred in the past. In addition, Galaxy recognized an extraordinary loss. Galaxy uses the term "operational earnings" when discussing its financial results. According to Galaxy, "operational earnings" excludes special nonrecurring transactions such as restructuring charges, discontinued operations, and extraordinary items. Should the restructuring charge and extraordinary loss be included or excluded from "operational earnings" for analytical purposes?

• A) Both are included ✓ Correct Answer
• B) One is included ✗ Your Answer
• C) Both are excluded

Question: Classification of non-operating income as operating would lead to stated earnings that are likely to be:

• A) compliant with GAAP and sustainable ✓ Correct Answer
• B) compliant with GAAP but not sustainable
• C) non-compliant with GAAP ✗ Your Answer

Question: Classification shifting is least likely to result in a higher:

• A) reported net income
• B) equity value derived when earnings forecasts are based on operating earnings ✓ Correct Answer
• C) firm value derived when cash flow forecasts are based on core earnings ✗ Your Answer

Question: Sustainable earnings are most likely to be driven by:

• A) Cash flow element of earnings ✓ Correct Answer
• B) Conservative revenue recognition practices ✗ Your Answer
• C) Accruals element of earnings

Question: Which of the following statements about operating income and operating cash flow are correct or incorrect? Statement #1: If operating income is growing faster than operating cash flow over the long-term, the firm may be recognizing revenue too soon or delaying the recognition of expense. Statement #2: Operating cash flow exceeding operating income is sustainable over the long-term.

• A) Both are incorrect
• B) Only one is correct ✓ Correct Answer ✗ Your Answer
• C) Both are correct

Question: Marcel Schulte is analyzing various retailing firms. Which of the following items is least indicative of a potential problem with revenue recognition and earnings quality?

• A) Implementing a “bill and hold” arrangement ✓ Correct Answer
• B) Use of barter transactions ✗ Your Answer
• C) Disproportionate revenues in the last quarter of the calendar year

Question: Charles Nicholls, chief investment officer of Gertmann Money Management, is reviewing the year-end financial statements of Zartner Canneries. In those statements he sees a sharp increase in inventories well above the sales-growth rate, and an increase in the discount rate for its pension liabilities. To determine whether or not Zartner Canneries is cooking the books, what should Nicholls do?

• A) Analyze trends in Zartner’s receivables and consider the changing characteristics of its work force
• B) Check Zartner’s cash-flow statement and review its footnotes ✓ Correct Answer ✗ Your Answer
• C) Calculate Zartner’s turnover ratios and review the footnotes of its competitors

Question: An analyst finds return-on-equity (ROE) (based on beginning of the year equity) a good measure of management performance and wants to compare two firms: Firm A and Firm

• A) 18.4 and 14.3 ✓ Correct Answer
• B) 16.0 and 18.0 ✗ Your Answer
• C) 17.1 and 16.9

Question: A firm has reported net income of $136 million, but the notes to financial statements includes a statement that the results "include a $27 million charge for non-insured earthquake damage" and a "gain on the sale of certain assets during restructuring of $16 million." If we assume that both of these items are given on a pre-tax basis and the effective tax rate is 36%, what would be the "normal income"?

• A) $143.04 million ✓ Correct Answer
• B) $147.00 million ✗ Your Answer
• C) $94.08 million

Question: Based on the revenue and cash collections data for SnapPrints and NetPhoto, Howard would most likely conclude that:

• A) NetPhoto is accelerating revenue ✓ Correct Answer
• B) SnapPrints is misclassifying nonrecurring and nonoperating revenue ✗ Your Answer
• C) SnapPrints is accelerating revenue

Question: In reviewing the footnotes to NetPhoto's financial statements, Howard discovers that the firm has engaged in a LIFO liquidation. The most likely effects on the financial statements (compared to no LIFO liquidation) are:

• A) a decrease in COGS and an increase in the net profit margin
• B) a decrease in inventory turnover and an increase in the gross profit margin ✓ Correct Answer ✗ Your Answer
• C) an increase in the gross profit margin and an increase in days of inventory

Question: An analyst is developing a framework for financial statement analysis for his firm. This framework is most likely to include:

• A) Define the purpose of the analysis, process input data, and follow up ✓ Correct Answer
• B) Determine the allocation of firm fees, interpret processed data, and communicate conclusions ✗ Your Answer
• C) Maintain integrity of capital markets, perform duties to clients and employers, and avoid conflicts of interest

Question: Inventories are listed on the balance sheet at $600,000, retained earnings are $1.9 Million. In the notes to financial statements, you find a LIFO reserve of $125,000. Also, the probability of a LIFO liquidation is high. Assuming a tax rate of 36%, what will be the adjusted value of retained earnings?

• A) $1,820,000.00 ✓ Correct Answer
• B) $1,855,000.00 ✗ Your Answer
• C) $1,980,000.00

Question: In order to compare companies using a common size statement, the various line items in a company's income statement are most likely to be divided by the company's:

• A) net earnings
• B) revenues ✓ Correct Answer ✗ Your Answer
• C) total assets

Question: ABC Tie Company reports income for the year 2009 as $450,000. The notes to its financial statements state that the firm uses the last in, first out (LIFO) convention to value its inventories, and that had it used first in, first out (FIFO) instead, inventories would have been $62,000 greater for the year 2008 and $78,000 greater for the year 2009. If earnings were restated using FIFO to determine the cost of goods sold (COGS), what would the net income be for the year 2009? Assume a tax rate of 36%. Net income would have been:

• A) $455,760 ✓ Correct Answer
• B) $460,240 ✗ Your Answer
• C) $439,760

Question: MKF Consolidated reports $500 million in goodwill on its balance sheet. The market consensus indicates that the value of MKF's intangible assets is $300 million. How should an analyst adjust MKF's balance sheet? Reduce goodwill and:

• A) increase liabilities by $200 million ✓ Correct Answer
• B) equity by $200 million
• C) equity by $500 million while increasing liabilities by $300 million ✗ Your Answer

Question: Which of the following statements regarding special purpose entities (SPEs) is least accurate?

• A) An SPE can be established as one of several legal forms, such as corporations, partnerships, or trusts, but must establish separate management from that of the sponsor ✓ Correct Answer
• B) In general, the equity investors in an SPE can expect to receive a limited rate of return on their investment in exchange for limited risk exposure
• C) An SPE can be formed to isolate specific assets from the sponsor, thus lowering the cost of capital by protecting the assets of the SPE in the event the sponsor experiences financial distress ✗ Your Answer

Question: According to US GAAP, if an SPE is to be considered a variable interest entity (VIE), it must meet which of the following conditions?

• A) The equity investors in the VIE must bear all of the SPE's risk up to a pre-determined level as outlined in the governing documents ✓ Correct Answer
• B) The SPE must be consolidated by the primary beneficiary, whose status as primary beneficiary is defined by the level of the firm's percentage of voting control
• C) The total at-risk equity of the SPE is not sufficient to finance the entity's activities without additional subordinated financial support ✗ Your Answer

Question: As outlined in FIN 46(R), the primary beneficiary of a VIE is that entity which meets which of the following conditions?

• A) Holds the majority voting control of the VIE and has separate management from the VIE ✓ Correct Answer
• B) Has exposure to the majority of the loss risks or receives the majority of the residual benefits of the VIE
• C) Holds the majority voting control of the VIE and shares management with the VIE ✗ Your Answer

Question: Milburne Company purchased 1,000 shares of Marino Co. for $20 per share on January 1 classified as FVPL. By December 31, shares of Marino were trading at $15 per share in the open market. Marino Co. has 100,000 shares outstanding with a dividend yield of 2% at year end. The impact of the Marino holding on the Milburne income statement is:

• A) −$5,300 ✓ Correct Answer
• B) −$4,700 ✗ Your Answer
• C) −$5,000

Question: Harter Company recently acquired a 40% stake in Compton Corp. for $40 million in cash by borrowing at 10%. Harter will account for this acquisition using which of the following methods:

• A) Acquisition Method ✓ Correct Answer ✗ Your Answer
• B) Held to maturity debt securities method
• C) Equity method

Question: Barrett Inc. is advised by its banker to create a special purpose entity (SPE) to convert its existing $15 million loan off-balance sheet. Under the terms of the deal, SPE would obtain a loan for $15 million from the bank with Barrett providing loan guarantee. Barrett would then sell $15 million of accounts receivable to the SPE and use the proceeds to pay off the current loan. Barrett prepares its financial statements under U.S. GAAP. Which of the following statements is most accurate regarding the impact of such an arrangement on Barrett's ratios?

• A) Barrett’s leverage would decrease and receivable turnover would increase ✗ Your Answer
• B) Barrett’s leverage would remain the same while receivable turnover would increase
• C) Barrett’s leverage as well as receivables turnover would remain the same ✓ Correct Answer

Question: The marketable securities balance amount shown on the balance sheet is:

• A) $3,000,000.00 ✓ Correct Answer
• B) $3,100,000.00 ✗ Your Answer
• C) $3,200,000.00

Question: In late 20X6, Company X decided to reclassify the investments in stock. What classification can the company classify the investment in stocks to?

• A) Fair value through profit or loss or amortized cost ✓ Correct Answer
• B) Reclassification would not be allowed
• C) Fair value through profit or loss only ✗ Your Answer

Question: The appropriate classification for the investment in government bonds would be:

• A) amortized cost, fair value through OCI, or fair value through profit or loss ✓ Correct Answer
• B) amortized cost or fair value through OCI
• C) amortized cost or fair value through profit or loss ✗ Your Answer

Question: Company X owns 15% of company S and exerts significant influence over the operations of the company. The book value of the investment on December 31, 2008, is $48,000. In 2009, company S earned $100,000 and paid dividends of $20,000. The impact of the investment on the income statement of company X is:

• A) $15,000 ✓ Correct Answer
• B) $12,000 ✗ Your Answer
• C) $3,000

Question: Accounting standards for intercorporate investments establish different categories of securities with distinct ways of treating them on the financial statements of the company. One category requires the securities to be carried at fair value on the balance sheet with unrealized gains and losses excluded from the income statement. This category of security classification is called debt:

• A) and equity securities classified as fair value through OCI ✓ Correct Answer
• B) securities classified at amortized cost ✗ Your Answer
• C) and equity classified as fair value through P&L securities

Question: A company reports an intercorporate investment using the acquisition method. Which of the following statements is most accurate?

• A) The use of the acquisition method by a company will generally report the more favorable results ✓ Correct Answer
• B) The use of the acquisition method by a company will generally report the less favorable results ✗ Your Answer
• C) The use of the equity method by a company will generally report the same results

Question: Which of the following statements about special purpose entities (SPE) are correct or incorrect? Statement #1: The sponsor usually maintains the decision-making power and voting control over the SPE. Statement #2: The equity owners of an SPE usually receive a rate of return that is tied to the performance of the SPE.

• A) Only one is correct ✓ Correct Answer
• B) Both are correct ✗ Your Answer
• C)

Question: Company A acquired a 50% stake in Company T on January 1, 2003 by paying T's shareholders $100,000 in cash. Pre-acquisition balance sheets for the two firms are presented below: Balance Sheet Company A Company T Current assets $400,000 $60,000 Fixed assets 600,000 100,000 Total $1,000,000 $160,000 Current liabilities $50,000 $ 30,000 Common stock 350,000 60,000 Retained earnings 600,000 70,000 Total $1,000,000 $160,000 The fair values of company T assets and liabilities was same as the book value. Company A reports under U.S. GAAP. What are the post-acquisition balance sheet values for total assets for Company A under the equity and acquisition methods of accounting respectively?

• A) $1,060,000 and $1,095,000
• B) $1,000,000 and $1,095,000 ✗ Your Answer
• C) $1,000,000 and $1,130,000. Omricon Capital Associates specializes in making investments in the small cap market sector. In some cases the firm operates as a supplier of private equity for restructurings. In this instance, the firm views itself as having a value investment focus. In others, it acts as a venture capital firm. Here, the investment focus is usually growth. Finally, in some cases it simply takes passive investment positions in publicly-traded firms. The positions in marketable securities are sometimes considered trading positions, and other times the view is to hold for a longer period until valuation parameters are met or exceeded ✓ Correct Answer

Question: Alpha Inc. owns 70% of the outstanding shares of Beta Inc. Compared to the debt-to-equity ratio under the partial goodwill method, Alpha's debt-to-equity ratio under the full goodwill method is most likely be:

• A) the same ✓ Correct Answer
• B) lower ✗ Your Answer
• C) higher. Birch Corporation is a large conglomerate based in the U.S. that has grown primarily through acquisition. On the first day of this reporting year, January 1, 2012, Birch acquired 1,500,000 shares of the common stock of TRQ Inc. TRQ Inc. produces high quality fabrics for use in the fashion industry. Exhibit 1 shows key numbers from TRQ Inc.'s accounts. Exhibit 1 - TRQ Financial Statement Extracts TRQ Inc Income – year ending 31 Dec 12 $700,000 Dividend paid $210,000 Number of common shares in issue 6,000,000 Number preferred shares in issue 3,000,000 Total number of shares in issue 9,000,000 Both Birch and TRQ prepare their accounts using US GAAP. Dan Fitzroy is the CFO of Birch, and is currently preparing with a meeting with the auditors to discuss the correct treatment of the TRQ investment in Birch's group accounts. Fitzroy is of the opinion that the equity method of accounting should be used for the following reasons: 1. The proportion of TRQ's common shares owned by Birch suggests that Birch has significant influence over TRQ's operations 2. The lack of ownership of preferred shares suggests that Birch has no significant influence over TRQ's operations 3. The proportion of TRQ's total shares owned by Birch suggests that Birch has significant influence over TRQ's operations

Question: Mustang Corporation formed a special purpose entity (SPE) for purposes of providing research and development. An unrelated firm absorbs the expected losses of the SPE and the independent shareholders of the SPE receive the expected residual returns. Is the SPE considered a variable interest entity (VIE) according to FASB Interpretation No. 46(R) and is consolidation required by Mustang, respectively?

• A) Yes ; Yes ✓ Correct Answer
• B) No ; No ✗ Your Answer
• C) Yes ; No

Question: Regarding accounting for joint ventures using the equity method or using proportionate consolidation, it would be most accurate to state that:

• A) the equity method results in a single line item on the income statement, and a single line item on the balance sheet ✓ Correct Answer
• B) both IFRS and US GAAP require the proportionate consolidation method be used to account for joint ventures ✗ Your Answer
• C) total net assets of the investor will differ between proportionate consolidation and the equity method. Assume that on the balance sheet date shown below TME Corporation acquires 70% of Abcor, Inc. common stock for $25,000 in cash. Pre-acquisition Balance Sheets December 31, 2001

Question: What will be the post-acquisition current ratio, using both the acquisition method and the equity method, respectively, for TME? The choices below represent Acquisition and Equity, respectively.

• A) 1.01, 0.92 ✓ Correct Answer
• B) 1.21, 1.02 ✗ Your Answer
• C) 1.04, 1.11

Question: Using the acquisition method to account for the acquisition, what will be the post-acquisition current assets of TME?

• A) $93,000 ✓ Correct Answer
• B) $118,000 ✗ Your Answer
• C) $105,000

Question: If Anderson Company accounts for the Birschbach Company shares as classified as fair value through OCI, the carrying amount of these shares on Anderson's balance sheet at the end of 2012 is:

• A) $3.5 million ✓ Correct Answer
• B) $2.5 million
• C) $2.6 million ✗ Your Answer

Question: If Anderson Company accounts for the Birschbach Company shares using the equity method, the carrying amount of these shares on Anderson's balance sheet at the end of 2012 is closest to:

• A) $2.8 million ✓ Correct Answer
• B) $2.6 million
• C) $3.5 million ✗ Your Answer

Question: For a stock grant, from the company's perspective, a tax windfall is most likely to result when the:

• A) stock price at settlement was higher than the stock price on the grant date ✓ Correct Answer
• B) intrinsic value at settlement was lower than the fair value on the grant date ✗ Your Answer
• C) stock price at settlement was lower than the stock price on the grant date

Question: In determining the fair value of employee stock options, which of the following statements is most appropriate?

• A) A higher than expected dividend yield will decrease the estimated fair value ✓ Correct Answer
• B) Absent a market-based instrument, U.S. GAAP and IFRS prefer firms to use the Black-Scholes option-pricing model ✗ Your Answer
• C) Changes in fair value after the grant date is taken directly to equity

Question: Which type of compensation is most likely to increase current liability for a company?

• A) Stock-option grants ✓ Correct Answer ✗ Your Answer
• B) Stock grants
• C) Salary and wages. Prisma Inc. started an employee stock option and RSU grant plan. On Jan 1, 20X1, the company made a grant of 150,000 at-the-money options (maturing in five years) and 25,000 shares. The fair value of the options was $1.79 and the stock price on the date of the grant was $16. Both awards vest after 3 years. The average stock price during the year was $17 and it was $17.50 at the end of the year

Question: The expense reported for 20X1 is closest to:

• A) $187,033 ✓ Correct Answer
• B) $222,833 ✗ Your Answer
• C) $133,333

Question: For forecasting the dilution from future grants of share-based compensation and its effects on valuation, which of the following approaches is least appropriate?

• A) Add share-based compensation expense estimates to free cash flow estimates and increase the number of shares outstanding based on the same estimates ✓ Correct Answer
• B) Deduct share-based compensation expense from estimates of free cash flows and ignore dilution ✗ Your Answer
• C) Discount the estimated value of equity by a dilution factor

Question: Under U.S. GAAP, capitalized periodic pension costs included in the value of ending inventory is most likely:

• A) to be amortized over the service lives of employees ✓ Correct Answer
• B) not allowed ✗ Your Answer
• C) to be expensed as part of cost of goods sold when the inventory is sold

Question: In order to decrease the projected benefit obligation (PBO) of a pension plan, which of the following changes in pension assumptions can be made to yield the desired result?

• A) Increase the expected rate of return
• B) Decrease the discount rate ✓ Correct Answer ✗ Your Answer
• C) Decrease the rate of compensation growth

Question: Current U.S. GAAP pension accounting standards require public companies to report which of the following in the balance sheet?

• A) The expected return on plan assets ✓ Correct Answer
• B) The pension liability adjusted for unrecognized items
• C) The funded status of the plan ✗ Your Answer

Question: As of December 31st, 2007, the fair value of plan assets was $21 million. For this question only, assume that the sum of the unrecognized prior service cost and the unrecognized actuarial losses equals $1.5 million. Calculate the amount attributable to Midwest's pension plan as of December 31st, 2007 that must be reported on the balance sheet under U.S. GAAP.

• A) $2.0 million ✓ Correct Answer
• B) −$2.0 million
• C) −$500,000 ✗ Your Answer

Question: A valuation of a firm based on the comparison of the firm with the market value of other firms is known as a:

• A) peer group valuation ✗ Your Answer
• B) relative valuation ✓ Correct Answer
• C) comparison valuation

Question: A valuation of a firm based on the intrinsic value of the firm's investment characteristics is known as an:

• A) asset based valuation ✓ Correct Answer ✗ Your Answer
• B) absolution valuation
• C) absolute valuation. Anna Heller, CFA, is a financial journalist and editor working for Money in the Morning, an online daily journal aimed at the investment industry. She is currently reviewing three articles, which staff writers have submitted to her for imminent publication. Heller has a few concerns with the articles, which she notes down as follows. Article One—The Modern Equity Valuation Process Introductory Paragraph: "The Grossman-Stiglitz paradox states that if security prices are informationally efficient there would be no reward to collecting and analyzing information. If this is the case no investor would collect and analyze information and the market price could not reflect intrinsic value. Further works have shown the easier intrinsic value is to estimate the bigger the potential divergence between price and value will be." Illustrative Example:

Question: In response to Heller's point regarding the Linpan discussion in Article Two, which of the following correctly identifies the suggested valuation method?

• A) Going Concern Valuation
• B) Liquidation Value ✓ Correct Answer ✗ Your Answer
• C) Orderly Liquidation Value

Question: In the Toys to You Inc. (TTY) discussion in Article Two, which of the following would be the most appropriate conclusion for the writer to add?

• A) TTY is attempting a strategy of product differentiation by committing to high quality products but appears to be failing as revenues are lower than its competitors
• B) TTY is attempting a strategy of cost leadership by keeping prices equal to or lower than its competitors but appears to be failing as margins are lower than its competitor’s ✗ Your Answer
• C) TTY is attempting a strategy of cost leadership by producing with the lowest cost base but appears to be failing as margins are lower than its competitor’s ✓ Correct Answer

Question: Which of the following would not be an example of one of Michael Porter's 5 competitive forces applicable to Toys to You?

• A) A new chain of toy stores, Games & Goodies, has opened up in key Toys to You territories
• B) Toys to You’s biggest supplier have ‘due to unforeseen market conditions’ added a 15% premium to key product lines ✗ Your Answer
• C) Due to cash flow issues Toys to You have been forced to halve the marketing and advertising budget compared to the previous financial year ✓ Correct Answer

Question: For an analyst valuing public equities, the relevant concept of value is most likely to be:

• A) fair market value ✗ Your Answer
• B) orderly liquidation value ✓ Correct Answer
• C) intrinsic value

Question: A wise analyst will examine a valuation to determine:

• A) ways to enhance a client's valuation ✓ Correct Answer ✗ Your Answer
• B) how well it will be received by the firm's management
• C) its sensitivity to changes in expectations

Question: An analyst is most likely to review the footnotes to a firm's financial statements to find information about the firm's:

• A) cash flow activities ✗ Your Answer
• B) accounting practices ✓ Correct Answer
• C) operation

Question: A valuation of a firm based on the assumption that the firm will continue to operate is referred to as its:

• A) going-concern value ✓ Correct Answer
• B) operating value ✗ Your Answer
• C) status quo value

Question: An ownership perspective can be important for an analyst determining the value of a share position. A controlling interest suggests the most appropriate model is a:

• A) cash flow model
• B) dividend discount model ✓ Correct Answer ✗ Your Answer
• C) time series model

Question: Disclosures of accounting practices and basis are most likely to be made in which part of a firm's financial reports?

• A) Footnotes ✓ Correct Answer
• B) The audit report ✗ Your Answer
• C)

Question: If the growth rate in dividends is too high, it should be replaced with:

• A) the growth rate in earnings per share ✗ Your Answer
• B) a growth rate closer to that of gross domestic product (GDP) ✓ Correct Answer
• C) the average growth rate of the industry

Question: Relative to traditional financial models like the dividend discount model, the biggest advantage of spreadsheet modeling is:

• A) accuracy of computations ✓ Correct Answer ✗ Your Answer
• B) quantity of computations
• C) simplicity of computations

Question: The current market price per share for Burton, Inc. is $33.33, and an analyst is using the Gordon Growth model to determine whether this is a fair price. The company paid a dividend of $2.00 last year on earnings of $2.50 a share. If the required rate of return is 12.00% and the expected grown rate in earnings and in dividends is 6%, the current market price is most likely:

• A) correctly valued ✗ Your Answer
• B) undervalued ✓ Correct Answer
• C) overvalued

Question: Xerxes, Inc. forecasts earnings to be permanently fixed at $4.00 per share. Current market price is $35 and required return is 10%. Assuming the shares are properly priced, the present value of growth opportunities is closest to:

• A) -$5.00 ✓ Correct Answer
• B) +$5.00 ✗ Your Answer
• C) +$3.50

Question: An investor projects the price of a stock to be $16.00 in one year and expected the stock to pay a dividend at that time of $2.00. If the required rate of return on the shares is 11%, what is the current value of the shares?

• A) $15.28 ✓ Correct Answer
• B) $16.22 ✗ Your Answer
• C) $14.11

Question: Given that a firm's current dividend is $2.00, the forecasted growth is 7%, declining over three years to a stable 5% thereafter, and the current value of the firm's shares is $45, what is the required rate of return?

• A) 10.5% ✓ Correct Answer
• B) 9.8% ✗ Your Answer
• C) 7.8%

Question: An investor buys shares of a firm at $10.00. A year later she receives a dividend of $0.96 and sells the shares at $9.00. What is her holding period return on this investment?

• A) -0.8% ✓ Correct Answer
• B) +1.2% ✗ Your Answer
• C) -0.4%

Question: An analyst has forecasted dividend growth for Triple Crown, Inc., to be 8% for the next two years, declining to 5% over the following three years, and then remaining at 5% thereafter. If the current dividend is $4.00, and the required return is 10%, what is the current value of Triple Crown shares based on a three-stage model?

• A) $91.11 ✓ Correct Answer
• B) $73.68 ✗ Your Answer
• C) $92.23

Question: Calculate the sustainable growth rate of Jakzach on 31 December 20x6. Note: Your calculations should use 20x6 beginning-of-year balance sheet values.

• A) 1% ✓ Correct Answer
• B) 9% ✗ Your Answer
• C) 10%

Question: Given that a firm's current dividend is $2.00, the forecasted growth is 7% for the next two years and 5% thereafter, and the current value of the firm's shares is $54.50, what is the required rate of return?

• A) 10% ✓ Correct Answer
• B) 9% ✗ Your Answer
• C) Can’t be determined

Question: The sustainable growth rate, g, equals:

• A) earnings retention rate times the return on equity ✓ Correct Answer
• B) pretax margin divided by working capital
• C) dividend payout rate times the return on assets ✗ Your Answer

Question: The H model will NOT be very useful when:

• A) a firm is growing rapidly ✓ Correct Answer
• B) a firm has low or no dividends currently
• C) a firm has a constant payout policy ✗ Your Answer

Question: The debate over whether to use the arithmetic mean or geometric mean of market returns for the capital asset pricing model (CAPM):

• A) limits its usefulness in estimating the required return of an asset ✓ Correct Answer
• B) has little practical effect because they are both very close
• C) was settled by the work of Harry Markowitz in 1972 ✗ Your Answer

Question: Which of the following models would be most appropriate for a firm that is expected to grow at an initial rate of 10%, declining steadily to 6% over a period of five years, and to remain steady at 6% thereafter?

• A) A two-stage model
• B) The Gordon growth model ✓ Correct Answer
• C) The H-model ✗ Your Answer

Question: Analyst Kelvin Strong is arguing with fellow analyst Martha Hatchett. Strong insists that the dividend discount model can be used to calculate the required return for a stock, though only if the growth rate remains constant. Hatchett maintains that while such models are useful for calculating the value of a stock, they should not be used to calculate required returns. Who is CORRECT? Strong Hatchett

• A) Incorrect Incorrect ✓ Correct Answer
• B) Correct Incorrect ✗ Your Answer
• C) Incorrect Correct

Question: The volatility of equity returns requires us to use data from long time periods to compute mean returns. One problem that this causes is that:

• A) the past is rarely an indication of the future
• B) equity premiums vary over time with perceived risk ✓ Correct Answer ✗ Your Answer
• C) inflation alters the value of the past returns

Question: Kyle Star Partners is expected to have earnings in year five of $6.00 per share, a dividend payout ratio of 50%, and a required rate of return of 11%. For year 6 and beyond the dividend growth rate is expected to fall to 3% in perpetuity. Estimate the terminal value at the end of year five using the Gordon growth model.

• A) $27.27 ✓ Correct Answer
• B) $37.50 ✗ Your Answer
• C) $38.63

Question: What is the value of a fixed-rate perpetual preferred share (par value $100) with a dividend rate of 11.0% and a required return of 7.5%?

• A) $147 ✓ Correct Answer
• B) $152 ✗ Your Answer
• C) $138

Question: The Gordon growth model is well suited for:

• A) biotech firms ✓ Correct Answer
• B) utilities ✗ Your Answer
• C) telecom companies

Question: If we know the forecast growth rates for a firm's dividends and the current dividends and current value, we can determine the:

• A) net margin of the firm
• B) sustainable growth rate ✓ Correct Answer
• C) required rate of return ✗ Your Answer

Question: In its most recent quarterly earnings report, Smith Brothers Garden Supplies said it planned to increase its dividend at an annual rate of 5% for the foreseeable future. Analyst Anton Spears is using a required return of 9.5% for Smith Brothers stock. Smith Brothers stock trades for $52.17 per share and earned $3.01 per share over the last 12 months. The company paid a dividend of $2.15 per share during the last 12-month period, and its dividend-growth rate for the last five years was 9.2%. Using the Gordon Growth model, the share price for Smith Brothers stock is most likely:

• A) overvalued ✓ Correct Answer
• B) undervalued ✗ Your Answer
• C) correctly valued

Question: Heather Callaway, CFA, is concerned about the accuracy of her valuation of Crimson Gate, a fast-growing telecommunications-equipment company that her firm rates as a top buy. Crimson currently trades at $134 per share, and Callaway has put together the following information about the stock: Most recent dividend per share $0.55 Growth rate, next 2 years 30% Growth rate, after 2 years 12% Trailing P/E 25.6 Financial leverage 3.4 Sales $1198 per share Asset turnover 11.2 Estimated market rate of return 13.2% Callaway's employer, Bates Investments, likes to use a company's sustainable growth rate as a key input to obtaining the required rate of return for the company's stock. Crimson's sustainable growth rate is closest to:

• A) 14.8% ✓ Correct Answer
• B) 16.6% ✗ Your Answer
• C) 13.2%

Question: Multi-stage dividend discount models can be used to estimate the value of shares:

• A) only under a limited number of scenarios ✓ Correct Answer
• B) only when the growth rate exceeds the required rate of return ✗ Your Answer
• C) under an almost infinite variety of scenarios

Question: Free cash flow approaches are the best source of value when:

• A) return on assets is falling
• B) dividends are not paid ✓ Correct Answer ✗ Your Answer
• C) a firm has significant minority interest

Question: The stable-growth free cash flow to the firm (FCFF) model is most useful in valuing firms that:

• A) have capital expenditures that are significantly higher than depreciation
• B) are growing at a rate significantly lower than that of the overall economy ✓ Correct Answer ✗ Your Answer
• C) have capital expenditures that are not significantly higher than depreciation

Question: Which of the following is most useful in analyzing firms that have high leverage and high growth?

• A) Two-stage free cash flow to the firm (FCFF) model ✓ Correct Answer
• B) Two-stage free cash flow to equity (FCFE) model ✗ Your Answer
• C) Stable-growth free cash flow to the firm (FCFF) model

Question: What is the expected growth rate in FCFF that Carson must have used to generate his valuation of $1.08 billion?

• A) 5% ✓ Correct Answer
• B) 7% ✗ Your Answer
• C) 12%

Question: If Carson had estimated FCFE under the assumption that Overhaul Trucking maintains a target debt-to-asset ratio of 36 percent for new investments in fixed and working capital, what would be his forecast of 2006 FCFE?

• A) $26.5 million ✓ Correct Answer
• B) $9.6 million ✗ Your Answer
• C) $16.9 million

Question: In forecasting free cash flows it is most common to assume that:

• A) historical levels of free cash flow will persist ✓ Correct Answer
• B) the firm has no non-cash expenses ✗ Your Answer
• C) the firm capital structure is static

Question: Free cash flow (FCF) approaches are the best source of value when:

• A) a firm has no preferred stock
• B) dividends are paid but do not reflect the company's capacity to pay dividends ✓ Correct Answer
• C) a firm has significant minority interest ✗ Your Answer

Question: If the investment in fixed capital and working capital offset each other, free cash flow to the firm (FCFF) may be proxied by:

• A) earnings before interest and taxes (EBIT) ✓ Correct Answer
• B) after-tax EBIT plus non-cash charges
• C) net income plus after-tax interest ✗ Your Answer

Question: A firm has projected free cash flow to equity next year of $1.25 per share, $1.55 in two years, and a terminal value of $90.00 two years from now, as well. Given the firm's cost of equity of 12%, a weighted average cost of capital of 14%, and total outstanding debt of $30.00 per share, what is the current value of equity?

• A) $71.74 ✓ Correct Answer
• B) $74.10 ✗ Your Answer
• C) $41.54

Question: Which of the following items is NOT subtracted from the net income to calculate free cash flow to equity (FCFE)?

• A) Interest payments to bondholders ✓ Correct Answer
• B) increase in accounts receivable ✗ Your Answer
• C) Increase in fixed assets

Question: Which of the following is least likely to change as the firm changes leverage?

• A) Free cash flows to firm (FCFF) ✓ Correct Answer
• B) Free cash flows to equity (FCFE) ✗ Your Answer
• C) Weighted average cost of capital (WACC)

Question: The ownership perspective implicit in the dividend valuation approach is of:

• A) a preferred stockholder ✓ Correct Answer
• B) control ✗ Your Answer
• C) a common stockholder

Question: On a per share basis for a firm: Sales are $10.00. Earnings per share (EPS) is $4.00. Depreciation is $3.00. After-tax interest is $2.40. Investment in working capital is $1.50. Investment in fixed capital is $2.00. What is the firm's expected free cash flow to the firm (FCFF) per share?

• A) $5.90 ✓ Correct Answer
• B) $7.50 ✗ Your Answer
• C) $2.90

Question: Which of the following statements regarding the P/E to growth (PEG) valuation approach is least accurate? The P/E to growth (PEG) valuation approach assumes that:

• A) there is a linear relationship between price to earnings (P/E) and growth ✓ Correct Answer
• B) stocks with higher PEGs are more attractive than stocks with lower PEGs
• C) there are no risk differences among stocks ✗ Your Answer

Question: An increase in growth will cause a price-to-earnings (P/E) multiple to:

• A) there is insufficient information to tell
• B) decrease ✓ Correct Answer
• C) increase ✗ Your Answer

Question: All other variables held constant, the justified price-to-book multiple will decrease with a decrease in:

• A) payout ratio
• B) expected growth rate ✓ Correct Answer
• C) required rate of return ✗ Your Answer

Question: Which of the following explanations is least likely to explain why Jenkins' stock picks underperform?

• A) Large stocks have an outsized effect on the benchmark data
• B) She is using the mean rather than the median valuation as a benchmark ✓ Correct Answer ✗ Your Answer
• C) Many stocks in the benchmark group are mispriced

Question: Which valuation ratio is least appropriate for comparing Massive and Mouse?

• A) Enterprise value/EBITDA because Massive and Mouse have very different debt levels ✓ Correct Answer
• B) Price/book because Massive is larger than Mouse ✗ Your Answer
• C) Price/cash flow because cash flows for small companies can be extremely volatile

Question: Mouse & Associates is cheaper than Massive Tech as measured by:

• A) the price/sales ratio and the dividend yield
• B) the earnings yield but not the price/book ✓ Correct Answer ✗ Your Answer
• C)

Question: One disadvantage of using the price/sales (P/S) multiple for stock valuation is that:

• A) sales are relatively stable and might not change even though earnings and value might change significantly ✓ Correct Answer
• B) profit margins are not consistent across firms within an industry ✗ Your Answer
• C) P/S multiple does not provide a framework to evaluate the effects of corporate policy decisions and price changes

Question: The observation that negative price to earnings (P/E) ratios are meaningless and prices are never negative is used to justify which valuation approach?

• A) Earnings yield ✓ Correct Answer
• B) Dividend discount model ✗ Your Answer
• C) Dividend yield

Question: An analyst is preparing a presentation on "Interpreting PE ratios" and has the following data: Portfolio % Stock PE Stock AAA 60% 10 Stock BBB 40% 15 Which of the following is the most appropriate measure for calculating the portfolio P/E?

• A) Weighted harmonic mean of the P/E’s ✓ Correct Answer
• B) Geometric mean of the P/E’s ✗ Your Answer
• C) Arithmetic average of the P/E’s

Question: Using justified trailing price-to-cash flow ratio and dividend yield based on forecasted fundamentals, Yantra appears to be:

• A) undervalued ✓ Correct Answer
• B) overvalued ✗ Your Answer
• C) the results are mixed

Question: If the appropriate adjustments to the five justified ratios are implemented following the launch of the new product line at Yantra, then:

• A) all five ratios will decline ✓ Correct Answer
• B) four ratios will decline ✗ Your Answer
• C) three ratios will decline

Question: In relation to Arda, Struma, and Tundzha, Beyan should opt for: Arda Struma Tundzha

• A) P/B norm P/E P/E ✓ Correct Answer
• B) P/B norm P/E P/S ✗ Your Answer
• C) P/E P/S P/E

Question: In relation to the companies in the marine navigation sector, Nunca is:

• A) undervalued relative to Nanuk ✓ Correct Answer
• B) overvalued relative to Nanuk ✗ Your Answer
• C) trading at premium due to its superior fundamentals

Question: Earnings before interest, taxes, depreciation, and amortization (EBITD

• A) debt capacity
• B) equity value ✓ Correct Answer
• C) total company value ✗ Your Answer

Question: A justified price multiple is the:

• A) multiple implied by the market price ✓ Correct Answer
• B) multiple implied by historical growth
• C) warranted or intrinsic price multiple ✗ Your Answer

Question: Which of the following are advantages of using EV/EBITDA?

• A) EV/EBITDA ignores how different revenue recognition policies affect CFO ✓ Correct Answer
• B) EBITDA is useful for valuing capital-intensive businesses with high levels of depreciation and amortization
• C) If working capital is growing, EBITDA will be larger than CFO ✗ Your Answer

Question: The net impact of an increase in payout ratio on price-to-book value (PBV) ratio cannot be determined because it might also:

• A) decrease required rate of return ✗ Your Answer
• B) decrease expected growth ✓ Correct Answer
• C) decrease the market value of the firm

Question: Margin and Sales Trade-off for CVR, Inc. and Home, Inc., for Next Year Firm Strategy Retention Rate Profit Margin Sales/Book Value of Equity CVR, Inc. High Margin / Low Volume 20% 8% 1.25 CVR, Inc. Low Margin / High Volume 20% 2% 4.00 Home, Inc. High Margin / Low Volume 40% 9% 2.00 Home, Inc. Low Margin / High Volume 40% 1% 20.0 (Note: CVR, Inc., has a book value of equity of $80 and a required rate of return of 10%. Home, Inc., has a book value of equity of $100 and a required rate of return of 11%.) If CVR, Inc., has a required return for shareholders of 10%, what is its appropriate leading price-to-sales (P/S) multiple if the firm undertakes the high margin/low volume strategy?

• A) 1.46 ✓ Correct Answer
• B) 0.80 ✗ Your Answer
• C) 0.20

Question: Margin and Sales Trade-off for CVR, Inc. and Home, Inc., for Next Year Firm Strategy Retention Rate Profit Margin Sales/Book Value (SBV) of Equity CVR, Inc. High Margin / Low Volume 20% 8% 1.25 CVR, Inc. Low Margin / High Volume 20% 2% 4.00 Home, Inc. High Margin / Low Volume 40% 9% 2.00 Home, Inc. Low Margin / High Volume 40% 1% 20.0 Note: CVR, Inc., has a book value of equity of $80 and a required rate of return of 10%. Home, Inc., has a book value of equity of $100 and a required rate of return of 11%. If Home, Inc., has a required return for shareholders of 11%, what is its appropriate leading price-to-sales (Po / S1) multiple if the firm undertakes the low margin/high volume strategy?

• A) 0.80 ✓ Correct Answer
• B) 0.20 ✗ Your Answer
• C) 1.00

Question: Industrial Light had earnings per share (EPS) of $5.00 past year, a dividend per share of $2.50, a cost of equity of 12%, and a long-term expected growth rate of 5%. What is the trailing price-to-earnings (P/E) ratio?

• A) 3.75 ✓ Correct Answer
• B) 7.50 ✗ Your Answer
• C) 7.14

Question: Which of the following valuation approaches is based on the rationale that stock values differ due to differences in the expected values of variables such as sales, earnings, or related growth rates?

• A) Method of forecasted fundamentals ✓ Correct Answer
• B) Free cash flow to the firm
• C) Method of comparables. Beachwood Builders merged with Country Point Homes on December 31, 2003. Both companies were builders of mid-scale and luxury homes in their respective markets. On December 31, 2013, because of tax considerations and the need to segment the businesses between mid-scale and luxury homes, Beachwood decided to spin-off Country Point, its luxury home subsidiary, to its common shareholders. Beachwood retained Bernheim Securities to value the spin-off of Country Point to its shareholders. The following information is available to Bernheim's investment bankers: Country Point's allocated common equity was $55.6 million as of December 31, 2013. Beachwood paid no dividends and has no preferred shareholders. Country Point's free cash flow (FCF) is expected to grow 7% after 2017. The current risk-free rate is 6%. The market risk premium is 11%. Beachwood Builders had 5 million common shares as of December 31, 2013. Country Point's cost of capital is equal to its return on equity at year-end (rounded to the nearest percentage point). Country Point did not have any long-term debt allocated from Beachwood. The following data for Country Point is also available for analysis: $ (in millions) 2013 2014(E) 2015(E) 2016(E) 2017(E) ✗ Your Answer

Question: Which of the following is NOT a common momentum valuation indicator?

• A) Dividend yield ✓ Correct Answer
• B) Relative strength ✗ Your Answer
• C) Earnings surprise

Question: Alpha Software (AS) recently reported annual earnings per share (EPS) of $1.75, which included an extraordinary loss of $0.19 and an expense of $0.10 related to acquisition costs during the accounting period, neither of which are expected to recur. Given that the most recent share price is $65.00, what is a useful AS's trailing price to earnings (P/E) for valuation purposes?

• A) 44.52 ✓ Correct Answer
• B) 37.14 ✗ Your Answer
• C) 31.86

Question: Sanford's economic value added (EVA®) for 2008 is closest to:

• A) $567.80 ✓ Correct Answer
• B) $1,383.20. ln ( ) = T × ln ( Sanford P/E Index P/E 1 + Sanford short-term growth rate + Sanford dividend yield 1 + Index growth rate + Index dividend yield ✗ Your Answer
• C)

Question: Calculate the "traditional" measure of Return on (opening) Equity for 20x6.

• A) 10.9% ✓ Correct Answer
• B) 13.2% ✗ Your Answer
• C) 14.7%

Question: Calculate Retty's EVA® for 20x6 based on end-of-year invested capital. (Ignore the potential problem created by the write-off of goodwill.)

• A) $1.3 million negative ✗ Your Answer
• B) $1.2 million negative
• C) $1.6 million positive ✓ Correct Answer

Question: Calculate the intrinsic value of the company using a residual income model, assuming that after four years, Silo's residual income will remain constant forever.

• A) $8.8 ✓ Correct Answer
• B) $11.4 ✗ Your Answer
• C) $10.7

Question: Regarding Oliver Chippy's comments on persistence factors: Comment 1 Comment 2

• A) Incorrect Correct ✓ Correct Answer
• B) Incorrect Incorrect
• C) Correct Incorrect ✗ Your Answer

Question: Krieger String & Twine expects to generate a return on equity (ROE) of 13.6% in each of the next five years. The required ROE is 8.7%. Current book value is $12.40 per share and the firm pays no dividends. Krieger previously assumed residual income falls to zero immediately after five years, but has now decided to recalculate its estimated value using a persistence factor of 35%. The difference between the new valuation and the old one is closest to:

• A) $0.64 per share ✓ Correct Answer
• B) $0.16 per share ✗ Your Answer
• C) $0.32 per share

Question: An analyst is considering the purchase of Rylinks, Inc., which has a price to book value (P/

• A) 11.00% ✗ Your Answer
• B) 10.60% ✓ Correct Answer
• C) 0.40%

Question: A use of the residual income (RI) valuation approach is:

• A) providing a check of consistency between competing approaches like free cash flow of equity (FCFE) and dividend discount model (DDM) ✓ Correct Answer
• B) deferring value more than in competing valuation approaches ✗ Your Answer
• C) providing more reliable estimates of terminal value

Question: Calculate the total value of the common stock in Busicomb Inc. at 31 December 20x5 using the constant growth residual income valuation model. Work to the nearest $m.

• A) $836m ✓ Correct Answer
• B) $579m ✗ Your Answer
• C)

Question: Binkster's comment is best described as:

• A) correct
• B) incorrect as gains or losses should not be adjusted ✓ Correct Answer ✗ Your Answer
• C) incorrect as the book value of equity should be adjusted

Question: A common adjustment in calculating economic value added (EVA®) is to:

• A) treat capital leases as operating leases ✓ Correct Answer
• B) add back deferred taxes ✗ Your Answer
• C) capitalize and amortize research and development expenses. Geremiah Analytics provides litigation consulting services to the intellectual property industry. They specialize in patent infringement liability and software valuation. Mariah Hofstedt, CFO of Geremiah, projects that the firm will earn $3 million pre-tax income this year. Additional selected financial data on Geremiah are presented below. Table 1: Selected Financial Data for Geremiah Analytics Total assets $40 million Debt/assets 60% Average coupon on debt 8%

Question: Is Constable right in his suggested renaming of the final valuation?

• A) Yes ✓ Correct Answer
• B) No, a valuation based on analysis of company fundamentals should be referred to as an Intrinsic Value
• C) No, it should be renamed Market Value as it uses primarily market information ✗ Your Answer

Question: Using Choo's additional notes on Bakan's 2x10 Net Income, which of the following is the most accurate estimate of normalized earnings for 2x10?

• A) Loss $150,000 ✓ Correct Answer
• B) Profit $250,000
• C) Loss $180,000 ✗ Your Answer

Question: Which of the following best describes the use of size premiums when estimating the discount rate for private company valuations?

• A) The treatment is similar to that for public firms
• B) A size premium is subtracted when calculating the discount rate ✓ Correct Answer ✗ Your Answer
• C) When using data from comparable public firms, a distress premium may be inadvertently added in

Question: Assume a minority shareholder holds 10% of a private firm's equity, with the CEO holding the other 90%. Using normalized earnings, the value of the firm's equity is estimated at $20 million. The CEO refuses to sell the firm and the minority shareholder cannot sell their interest easily. A discount for lack of marketability (DLOM) of 15% will be applied. A discount for lack of control (DLO

• A) $1,700,000 ✓ Correct Answer
• B) $1,900,000 ✗ Your Answer
• C) $1,615,000

Question: Compared to a public company, it is most likely that as a private company Timber Industries will have greater:

• A) focus on the short-term ✗ Your Answer
• B) quality and depth of management ✓ Correct Answer
• C) concerns related to taxes

Question: One valuation method that Smith is considering for Timber Industries involves using a growing perpetuity formula to estimate the value of intangible assets, and then adding this value to the values of working capital and fixed assets. This method is most accurately described as the:

• A) free cash flow method ✗ Your Answer
• B) excess earnings method ✓ Correct Answer
• C)

Question: The asset-based approach to private company valuation that Smith is considering for Timber Industries is most likely to be appropriate in the case of a:

• A) finance firm such as a bank
• B) mature company with many intangible assets ✓ Correct Answer
• C) firm with strong profits and growth potential ✗ Your Answer

Question: Which of the following statements related to discounts and premiums to benchmark for Smith's private company valuation of Timber Industries is most accurate?

• A) A discount for lack of marketability should be applied when the comparables are based on public shares, and the interest in the target company is a minority interest in a private firm ✓ Correct Answer
• B) A discount for lack of control should be applied when the comparable company values are for public shares, and the target company valuation is for a controlling interest
• C) A control premium should be added when the comparable values are for the sale of an entire company, and the valuation is being done for a minority interest in the target company ✗ Your Answer

Question: A private pharmaceutical firm is under consideration for acquisition where the financial buyer will pay with equity. Part of the payment to the sellers is based on FDA approval of the firm's drug. If the analyst uses a market approach and comparable data from public firms, which of the following would most likely result in a price-multiple that is too high? The comparable data is:

• A) from transactions where the buyer used cash ✓ Correct Answer
• B) for strategic buyers ✗ Your Answer
• C) for transactions where the consideration was non-contingent

Question: An analyst is valuing a private firm on the behalf of a strategic buyer and deflates the average public company multiple by 15% to account for the higher risk of the private firm. Given the following figures, calculate the value of firm equity using the guideline public company method (GPCM). Market value of debt $4,100,000 Normalized EBITDA $42,800,000 Average EV/EBITDA multiple 8.5 Control premium from past transaction 25% The enterprise value of the firm is closest to:

• A) $386,484,000 ✓ Correct Answer
• B) $304,060,000 ✗ Your Answer
• C) $382,384,000

Question: Which of the following is least likely an example of a litigation-related valuation for a private company?

• A) Lost profits claims ✓ Correct Answer
• B) Bankruptcy proceeding
• C) Divorce settlements ✗ Your Answer

Question: Which of the following statements related to the models used to estimate the required rate of return to private company equity is most accurate:

• A) The CAPM model uses betas estimated from firm returns of other private firms ✓ Correct Answer
• B) The expanded CAPM model adds premiums for size and firm-specific risk
• C) The build-up method begins with betas for comparable public firms and adds risk premiums ✗ Your Answer

Question: Which of the following statements most accurately describes the difference between private and public firm managers?

• A) Although managers in a public firm are often paid with incentive compensation, public managers may take a shorter term view than private managers because shareholders often focus on the short-term ✓ Correct Answer
• B) Because managers in a public firm are often paid with incentive compensation, public managers may take a longer term view than private managers
• C) Because managers in a private firm are concerned with having the firm go public, private managers may take a shorter term view than public managers ✗ Your Answer

Question: An analyst is valuing a firm's equity using the price-to-book-value ratio of similar firms. Which of the following is the most likely valuation approach the analyst will use?

• A) The income approach
• B) The market approach ✓ Correct Answer
• C) The asset-based approach. Stan Bowles works for Marsh Inc. and has been tasked with the valuation of Park Limited, a small private footwear producer. Bowles prepares a valuation report on Park Limited and his report contains the following: Comment 1: Company-specific characteristics such as the quality and depth of management, tax considerations, and shareholders agreements that restrict liquidity mark the main differences between a private and public company ✗ Your Answer

Question: Comment 2 is describing:

• A) fair value ✗ Your Answer
• B) investment value ✓ Correct Answer
• C) fair market value

Question: Using Comment 4, which of the following method is least likely to require a discount for lack of control?

• A) Guideline Transaction Method ✓ Correct Answer
• B) Capitalized Cash Flow Method ✗ Your Answer
• C) Guideline Public Company Method

Question: Which of the following best describes the estimation of discounts for lack of marketability (DLOM) in private company valuations? The primary advantage of using put prices to estimate the DLOM over the other two methods is:

• A) the volatility of the firm can be incorporated into the analysis ✓ Correct Answer
• B) the Black-Scholes model has been shown to be valid for private firms ✗ Your Answer
• C) exchange traded put prices are readily available

Question: The effective duration for Portfolio 2 is closest to:

• A) 1.47 ✓ Correct Answer
• B) 0.023 ✗ Your Answer
• C) 1.62

Question: 5%, 15-year, annual pay option-free Xeleon Corp bond trades at a market price of $95.72 per $100 par. The government spot rate curve is flat at 5%. The Z-spread on Xeleon Corp bond is closest to:

• A) 300 bps ✓ Correct Answer
• B) 325 bps ✗ Your Answer
• C) 250 bps

Question: To jump start a sluggish economy could most likely lead to a:

• A) bullish steepening ✓ Correct Answer
• B) bearish flattening ✗ Your Answer
• C) bearish steepening

Question: The swap spread will increase with:

• A) a deterioration in one party’s credit ✗ Your Answer
• B) the variability of interest rates ✓ Correct Answer
• C) an increase in the credit spread embedded in the reference. James Wallace, CFA, is a fixed income fund manager at a large investment firm. Each year, the firm recruits a group of new college graduates in the spring to enter in the firm's management training program. The program is a rigorous six-month course that exposes every candidate to each of the different departments within the firm. After successfully completing the six-month training period, candidates then receive offers for employment in one of the departments within the investment firm. Recently, Wallace was selected by his boss to teach the fixed income portion of the firm's training program. He will be able to hold several two-hour sessions with the new hires over a two-week time period, during which he is expected to instruct the trainee's on all aspects of fixed income analysis. These sessions serve as preparation for the trainees to be able to complete a month long rotation on the fixed income trading desk. His first few sessions will cover the core concepts of fixed income investing. Wallace believes that in order to fully grasp the more complicated concepts of fixed income analysis, the new hires must first begin by having a complete knowledge of the term structure and the volatility of interest rates. The new hires each have different educational backgrounds and varying amounts of work experience, so Wallace decides to begin with the most very basic concepts. He wants to start by teaching the various theories of the term structure of interest rates, and the implications of each theory for the shape of the Treasure yield curve. To evaluate the trainees' understanding of the subjects at hand, he creates a series of questions

Question: Suppose the government spot rate curve is flat at 3%. An active manager is planning on purchasing a five-year government bond at par. The realized return on this bond will most likely be:

• A) more than 3% if the bond is held to maturity while the yield curve remains flat but decreases below 3% ✓ Correct Answer
• B) 3% if the bond is held to maturity provided that the yield curve remains flat at 3%
• C) 3% if the bond is held to maturity regardless of the shape of the yield curve ✗ Your Answer

Question: If the spot curve is upward sloping, the forward curve is most likely to be:

• A) steeper than the spot curve and above the spot curve ✓ Correct Answer
• B) parallel to the spot curve and below the spot curve
• C) parallel to the spot curve and above the spot curve ✗ Your Answer

Question: Assuming the pure expectations theory is correct, an upward sloping yield curve implies:

• A) longer-term bonds are riskier than short-term bonds ✗ Your Answer
• B) interest rates are expected to decline in the future ✓ Correct Answer
• C) interest rates are expected to increase in the future

Question: Eden's second comment about bond spreads is most likely:

• A) correct ✓ Correct Answer
• B) incorrect, because a narrowing spread indicates a reduction in risk in the banking system
• C) incorrect, because the spread does not give a specific indication about risk in the banking system ✗ Your Answer

Question: During the recent credit crises in the country of Maltovia, several money market funds reported large losses. Subsequently, the Maltovian regulatory body imposed strict restrictions on maturity of securities that money market funds could invest in. The reaction of Maltovian regulatory body was most likely based on a belief in:

• A) market segmentation theory
• B) preferred habitat theory ✓ Correct Answer
• C) local expectations theory ✗ Your Answer

Question: Based on Jensen's Statement 1, which model is most appropriate?

• A) The Kalotay-Williams-Fabozzi (KWF) model
• B) A Gauss+ multifactor model ✓ Correct Answer
• C) The Ho-Lee model ✗ Your Answer

Question: Based on Jensen's Statement 2, which model is least appropriate?

• A) The Vasicek model ✓ Correct Answer
• B) The Cox-Ingersoll-Ross (CIR) model
• C) The Ho-Lee model ✗ Your Answer

Question: Based on Jensen's Statement 3, which model is most appropriate?

• A) The Cox-Ingersoll-Ross (CIR) model ✓ Correct Answer
• B) The Kalotay-Williams-Fabozzi (KWF) model
• C) The Vasicek model ✗ Your Answer

Question: Regarding Jensen's observations:

• A) both observations are incorrect ✓ Correct Answer
• B) only Observation 2 is correct
• C) only Observation 1 is correct ✗ Your Answer

Question: The government bond spot rate curve is given below: Maturity (years) Spot rate 0.5 1.25% 1.0 1.30% 1.5 1.80% 2.0 2.00% 2.5 2.20% 3.0 2.25% 3.5 2.28% 4.0 2.30% Compute the issue price of a 3-year, 3% semiannual coupon government bond with a par value of $100.

• A) $102.15 ✓ Correct Answer
• B) $104.09 ✗ Your Answer
• C) $102.20

Question: Relative to the binomial model, Monte Carlo method is most likely:

• A) less flexible in forcing interest rates to mean revert ✓ Correct Answer ✗ Your Answer
• B) more flexible as it does not need a volatility estimate
• C) more suitable when valuing securities whose cash flows are interest rate path dependent

Question: Jill Sebelius, editor-in-chief of a monthly interest-rate newsletter uses the following model to forecast short-term interest rates: For the current newsletter, Sebelius has issued the following expectations: a=0.40, b = 3%, r = 2%. Based on Sebelius's estimates, over a sufficiently long period of time, the expected value of the short-term interest rate is closest to:

• A) 3% ✓ Correct Answer
• B) 2.4% ✗ Your Answer
• C) 2%

Question: The process of stripping is most likely to be used to earn arbitrage profits in a situation where:

• A) a portfolio of treasury strips is trading for a lower price than an intact treasury bond ✓ Correct Answer
• B) one treasury bond trades at a lower price than another treasury bond with identical characteristics ✗ Your Answer
• C) Security valuations are not consistent with the value additivity principle

Question: Which of the following is equal to the value of a noncallable / nonputable convertible bond? The value of the corresponding:

• A) callable bond plus the value of the call option on the stock ✓ Correct Answer
• B) straight bond ✗ Your Answer
• C) straight bond plus the value of the call option on the stock

Question: Which of the following statements is most accurate concerning a convertible bond? A convertible bond's value depends:

• A) only on changes in the market price of the stock ✓ Correct Answer
• B) on both interest rate changes and changes in the market price of the stock ✗ Your Answer
• C) only on interest rate changes

Question: The effective convexity of a bond is most likely to be negative if the bond is:

• A) callable ✓ Correct Answer
• B) putable ✗ Your Answer
• C) option-free. Bill Woods, CFA, is a portfolio manager for Matrix Securities Fund, a closed-end bond fund that invests in U.S. Treasuries, mortgage-backed securities (MBS), asset-backed securities (ABS), and MBS derivatives. The fund has assets of approximately $400 million, has a current stock price of $14.50 and a net asset value (NAV) of $16.00. Woods is a member of a four person investment team that is responsible for all aspects of managing the portfolio, including interest rate forecasting, performing basic financial analysis and valuation of the portfolio, and selecting appropriate investments for Matrix. His expertise is in the analysis and valuation of MBS and ABS. The fund pays a $0.12 monthly dividend that is paid from current income. The basic operating strategy of Matrix is to leverage its capital by investing in fixed income securities, and then financing those assets through repurchase agreements. Matrix then earns the spread between the net coupon of the underlying assets and the cost to finance the asset. Therefore, when evaluating a security for investment, it is critical that Matrix can be reasonably assured that it will earn a positive spread. During the course of his analysis, Woods utilizes several methodologies to evaluate current portfolio holdings and potential investments. Valuation methods he uses include nominal spreads, Z-spreads, and option-adjusted spreads (OAS). There is ongoing debate among the investment team as to the merits and shortcomings of each of the methods. Woods believes that the OAS method is by far a superior tool in all circumstances, while his fellow portfolio manager, Yuri Ackerman, feels that each of the methods can at times serve a useful purpose. Wood and Ackerman's current discussion involves two similar FNMA adjustable-rate mortgage (ARM) securities Wood is considering purchasing. Both ARM "A" and ARM "B" are indexed off of 6-month LIBOR, are new production, and have similar net coupons. Select Financial Information: ARM Net Coupon WAM Nominal Spread OAS (bps) Z-spread (bps) A 6.27% 360 81 98 135 B 6.41% 358 95 116 129 Woods recommends that Matrix purchase ARM "A" with the 6.27% net coupon. He has based his conclusion on the calculated OAS of the securities, which he believes indicates that ARM "A" is the cheaper of the two securities. Ackerman disagrees with Woods, arguing that OAS

Question: Woods is most likely resistant to the zero-volatility spread because the spread:

• A) only considers one path of interest rates, the current Treasury spot rate curve ✓ Correct Answer
• B) fails to consider price risk, which is uncertainty regarding terminal cash flows
• C) does not indicate how much of the spread reflects the significant prepayment risk associated with MBS ✗ Your Answer

Question: In general, the investment team at Matrix attempts to buy "cheap" securities because they are undervalued on a relative basis. What is a characteristic of a "cheap" security for a given Z-spread and effective duration?

• A) High OAS relative to the required OAS and high option costs ✓ Correct Answer
• B) High OAS relative to the required OAS and low option costs
• C) Low OAS relative to the required OAS and low option costs ✗ Your Answer

Question: Which of the two bonds Woods is considering purchasing has the greater interest rate exposure?

• A) ARM B, because it has a smaller duration ✓ Correct Answer
• B) The interest rate exposure cannot determine without a specific measure of convexity
• C) ARM A, because it has a larger duration ✗ Your Answer

Question: Matrix also currently has investments in several ABS. Which of the following spread measures is most appropriate in the analysis of ABS backed by credit card receivables?

• A) Monte Carlo simulation model, because representative paths can be utilized ✓ Correct Answer
• B) Z-spread, because credit card ABS have no prepayment option
• C) OAS, because the cash flows are interest rate path dependent. Alnoor Hudda, CFA, is valuing two floaters issued by Mateo Bank. Both floaters have a par value of $100, three year life and pay based on annual MRR. Hudda has generated the following binomial tree for MRR. 1-year forward rates starting in year: 0 1 2 ✗ Your Answer

Question: Value of a capped floater with a cap of 4% is closest to:

• A) $96.71 ✓ Correct Answer
• B) $97.38 ✗ Your Answer
• C) $98.70

Question: Value of the cap in a capped floater with a cap of 4% is closest to:

• A) $4.41 ✓ Correct Answer
• B) $1.29 ✗ Your Answer
• C) $1.23

Question: Using the following tree of semiannual interest rates what is the value of a 5% callable bond that has one year remaining to maturity, a call price of 99 and pays coupons semiannually? 7.76% 6.20% 5.45%

• A) 97.17 ✓ Correct Answer
• B) 98.29 ✗ Your Answer
• C) 99.01. Kate Inka is a new hire for Maya Incorporated, a fixed income fund manager. On her first week on the job, she is asked to prepare a presentation on valuation and analysis of bonds with embedded options. Inka starts her presentation with the following three statements: Statement "In times of increased expectations of interest rate volatility the value of callable bonds will fall."

Question: Which value for the backwardly induced price of the corporate callable bond using the binomial tree in Exhibit 1 is most accurate?

• A) $105.69 ✓ Correct Answer
• B) $104.89 ✗ Your Answer
• C) $105.20

Question: How many of Inka's comments about her binomial tree exercise are correct?

• A) One ✓ Correct Answer
• B) Two ✗ Your Answer
• C) Three

Question: How many of Inka's comments about duration are accurate?

• A) One ✓ Correct Answer
• B) Three ✗ Your Answer
• C) Two

Question: Which of the following is the appropriate "nodal decision" within the backward induction methodology of the interest tree framework for a putable bond?

• A) Min(put value, discounted value) ✓ Correct Answer
• B) Max(par value, discounted value)
• C) Max(put price, discounted value) ✗ Your Answer

Question: Which of the following correctly describes one of the basic features of a convertible bond? A convertible bond is a security that can be converted into:

• A) common stock at the option of the investor ✓ Correct Answer
• B) common stock at the option of the issuer
• C) another bond at the option of the issuer ✗ Your Answer

Question: Which of the following is the appropriate "nodal decision" within the backward induction methodology of the interest tree framework for a callable bond?

• A) Max(call price, discounted value) ✓ Correct Answer
• B) Min(par value, discounted value)
• C) Min(call price, discounted value) ✗ Your Answer

Question: Which of the following statements about how interest rate volatility affects the value bond is most accurate? When interest rate volatility increases, the value of a:

• A) callable bond decreases ✓ Correct Answer
• B) putable bond decreases
• C) straight bond decreases ✗ Your Answer

Question: If a bond's key rate durations for maturity points shorter than the bond's maturity are negative, it is most likely that the bond being analyzed is a:

• A) zero coupon bond ✓ Correct Answer
• B) putable bond
• C) callable bond. Eric Rome works in the back office at Finance Solutions, a limited liability firm that specializes in designing basic and sophisticated financial securities. Most of their clients are commercial and investment banks, and the detection, and control of interest rate risk is Financial Solution's competitive advantage. One of their clients is looking to design a fairly straightforward security: a callable bond. The bond pays interest annually over a two-year life, has a 7% coupon payment, and has a par value of $100. The bond is callable in one year at par ($100). Rome uses a binomial tree approach to value the callable bond. He's already determined, using a similar approach, that the value of the option-free counterpart is $102.196. This price came from discounting cash flows at on-the-run rates for the issuer. Those discount rates are given below: ✗ Your Answer

Question: Using the binomial tree model, what is the value of the callable bond?

• A) $101.735 ✓ Correct Answer
• B) $95.521 ✗ Your Answer
• C) $102.196

Question: What is the value of the call option embedded in this bond?

• A) $6.675 ✓ Correct Answer
• B) $0.461 ✗ Your Answer
• C) $12.924

Question: If the bond is putable in one year at par, the value of the put is closest to:

• A) $0.461 ✓ Correct Answer
• B) $0.291 ✗ Your Answer
• C) $12.487

Question: The market conversion premium ratio for Stellar's convertible bond is closest to:

• A) 20.6% ✓ Correct Answer
• B) 28% ✗ Your Answer
• C) 2.40%

Question: Credit scores and credit ratings are both:

• A) cardinal rankings
• B) qualitative ratings ✓ Correct Answer ✗ Your Answer
• C) ordinal rankings

Question: Credit scores are most likely to be used for:

• A) sovereign bonds
• B) small businesses ✓ Correct Answer ✗ Your Answer
• C) ABS

Question: Which of the following factors is least likely a determinant of term structure of credit spreads?

• A) Existence of off-balance sheet liabilities
• B) Equity market volatility ✓ Correct Answer ✗ Your Answer
• C) Financial conditions in the market

Question: Based on Exhibit 1, and the stated risk-free rate on two-year zero-coupon bonds, the credit spread on the Shumensko bond is closest to:

• A) 0.12% ✓ Correct Answer
• B) 0.18% ✗ Your Answer
• C) 0.95%

Question: Which of the assumptions stated by Scowen regarding the reduced form model is most accurate?

• A) Assumption 3 ✓ Correct Answer
• B) Assumption 1 ✗ Your Answer
• C) Assumption 2

Question: Using information in Exhibit 2, the value of the Sleepy Bond is closest to:

• A) $9,433.50 ✓ Correct Answer
• B) $9,566.27 ✗ Your Answer
• C) $9,500.00

Question: Scowen's comment regarding option pricing theory and structural models is best described as:

• A) accurate ✓ Correct Answer
• B) inaccurate, as structural models value risky debt by deducting the value of a call option on the company’s assets from the value of risk free debt
• C) inaccurate, as structural models value risky debt by adding the value of a put option on the company’s assets to the value of risk-free debt ✗ Your Answer

Question: Which of the following statements regarding evaluating credit risk of Asset Backed Securities (ABS) is least accurate?

• A) Unlike for corporate debt, structural and reduced form models are not appropriate ✗ Your Answer
• B) The analysis should entail consideration of the composition of the collateral pool and the cash flow waterfall ✓ Correct Answer
• C) Credit rating agencies do not use the same credit ratings for ABS as for corporate debt

Question: Mihor Kotak is evaluating the impact of a ratings upgrade on 1Team bonds. The bonds have a modified duration of 5.88 and the current credit spread on the bonds is 60 bps. After the upgrade, Kotak expects that the spreads will narrow by 15bps. Based on Kotak's expectations, what will be the estimated change in the price of the bond if the upgrade occurs?

• A) 8.82% ✓ Correct Answer
• B) 0.38% ✗ Your Answer
• C) 0.88%

Question: -year, 5% Zillon Corp. bonds currently trade at $980 reflecting credit spread of 3%. A 5-year CDS for Zillon bonds has a coupon rate of 5%. The duration of the CDS = 4. The upfront payment made/received by the protection buyer on a $4 million notional CDS is closest to:

• A) $400,000 received by the protection buyer ✓ Correct Answer ✗ Your Answer
• B) $320,000 received by the protection buyer
• C) $300,000 paid by the protection buyer

Question: A credit default swap (CDS) will change in value:

• A) only when a failure to pay, a bankruptcy, or a restructuring occurs ✗ Your Answer
• B) whenever the credit quality of the reference entity changes ✓ Correct Answer
• C) only when default occurs

Question: Considering the two parties to a credit default swaps (CDS), the protection buyer is most likely to be:

• A) said to be long the reference entity’s credit risk ✓ Correct Answer ✗ Your Answer
• B) bullish on the financial condition of the reference entity
• C) exposed to the credit risk of the protection seller

Question: Which of the three statements in the introductory paragraph is correct?

• A) The statement describing the separation of credit and interest rate risk ✓ Correct Answer
• B) The statement describing the bonds covered by a single name CDS
• C) The statement describing the payoff on a credit event ✗ Your Answer

Question: Using the information under the heading "Illustration CTD," which of the three bonds would be the cheapest to deliver?

• A) Bond Q ✓ Correct Answer
• B) Bond P ✗ Your Answer
• C)

Question: Using information in Exhibit 2, the gain on the position is closest to:

• A) £1,080,000 ✓ Correct Answer
• B) £1,440,000 ✗ Your Answer
• C) £4,320,000

Question: Which of the comments relating to the credit curve is least accurate?

• A) The definition of the credit curve ✓ Correct Answer
• B) The description and example of the naked CDS position
• C) The description and example of the curve trade ✗ Your Answer

Question: Regarding CDS credit events, a CDS is least likely to pay off upon occurrence of a:

• A) failure to pay ✓ Correct Answer
• B) restructuring ✗ Your Answer
• C) bankruptcy

Question: As compared to a production value-weighted index, an equally weighted index would most likely have:

• A) higher weight to oil ✓ Correct Answer
• B) lower weight to oil ✗ Your Answer
• C) equal weight to oil

Question: Which commodity is most likely to be characterized by large economies of scale in production?

• A) Copper ✓ Correct Answer
• B) Wheat ✗ Your Answer
• C) Cattle

Question: Don Chancery is working on a forecast of commodity price movements for the economic research department at his investment firm. He is basing his predictions on the theory that pricing is driven solely by producers who hold (or expect to hold) commodities, and hedge their position with a short futures contract, leading to normal backwardation. Which of the following theories is Chancery most likely using?

• A) The Hedging Pressure Hypothesis
• B) The Insurance Theory ✓ Correct Answer ✗ Your Answer
• C) The Theory of Storage

Question: Ben Tarson, CFA is currently undertaking an analysis of the commodity markets to present to a potential client. Part of his presentation concerns the impact short hedgers have on the price of commodity futures contracts. Which of the following market participants is most likely to take a short hedge position?

• A) A hedge fund buying copper in the spot market and selling copper futures contracts
• B) Wheat farmer looking to sell wheat forward ✓ Correct Answer ✗ Your Answer
• C) Airline looking to purchase fuel forward

Question: Which of the following commodities has historically been least likely to be traded globally?

• A) Livestock ✓ Correct Answer
• B) Corn ✗ Your Answer
• C) Natural gas

Question: Suppose that corn futures contracts are in backwardation. Which of the following is least likely to be true?

• A) Spot price of corn is higher than the futures price ✓ Correct Answer
• B) the basis for corn futures contract is negative ✗ Your Answer
• C) roll yield on the corn futures is positive

Question: Which of the following least accurately identifies a type of publicly traded real estate security?

• A) Investment trusts ✓ Correct Answer
• B) Direct mortgage lending
• C) Operating companies ✗ Your Answer

Question: Which of the following is most likely to represent a publicly traded real estate debt investment?

• A) A real estate operating company (REOC)
• B) Secured bank debt collateralized by real estate ✓ Correct Answer
• C) A mortgage real estate investment trust (Mortgage REIT) ✗ Your Answer

Question: If the pension fund chooses to invest in hotels over apartments, one possible reason for this is that hotels:

• A) may offer higher rates of returns because of higher operational risk
• B) are commercial properties while apartments are residential properties ✓ Correct Answer ✗ Your Answer
• C) are not affected by cost and availability of debt capital

Question: Which statement regarding issues with indices is least likely correct?

• A) Chekov’s statement ✓ Correct Answer
• B) Chanwit’s statement ✗ Your Answer
• C) Clarkson’s statement

Question: Which of the following most accurately identifies one of the disadvantages of investing in real estate through publicly traded securities? Compared to other real estate investment vehicles, publicly traded securities expose investors to:

• A) unlimited liability
• B) more-volatile returns ✓ Correct Answer ✗ Your Answer
• C) inferior liquidity

Question: Which of the following most accurately identifies one of the characteristics of a private equity investment in income-producing real estate?

• A) Sensitivity to the credit market ✓ Correct Answer
• B) Homogeneity ✗ Your Answer
• C) Passive management

Question: Retail sales growth is most likely to be a top economic factor affecting the economic value of a(n):

• A) industrial REIT ✓ Correct Answer
• B) residential REIT ✗ Your Answer
• C) health care REIT

Question: The net asset value approach to valuation makes sense for REITs because:

• A) NAV equals the value that public equity investors attach to a REIT
• B) there exist active private markets for real estate assets ✓ Correct Answer ✗ Your Answer
• C) the price at which a REIT trades very closely tracks NAV

Question: Which of the following most accurately describes an approach to REIT valuation?

• A) The discounted cash flow approach typically consists of intermediate-term cash flow projections plus a terminal value based on cash flow multiples ✓ Correct Answer
• B) The P/AFFO approach avoids estimates and assumptions in its calculation ✗ Your Answer
• C)

Question: Which of the following is the most likely to represent an advantage of investing in publicly traded real estate securities over direct ownership of property? Publicly traded real estate securities offer:

• A) more control over investment decisions
• B) greater liquidity ✓ Correct Answer
• C) lower price volatility ✗ Your Answer

Question: Which of the following is an expense normally deducted from accounting net earnings but not from FFO?

• A) Property operating expenses
• B) Depreciation expense ✓ Correct Answer
• C) Property taxes ✗ Your Answer

Question: If a REIT has assets with a current market value of $3,000,000, liabilities with a current market value of $2,000,000, and 100,000 shares outstanding, what is the NAVPS per share?

• A) $50.00 ✓ Correct Answer
• B) $30.00 ✗ Your Answer
• C) $10.00

Question: When calculating NAVPS, a real estate company's assets and liabilities are valued at their:

• A) book value ✓ Correct Answer
• B) liquidation value ✗ Your Answer
• C) market value

Question: Which of the following least accurately describes a major category of due diligence factors that should be investigated in determining the value of a property?

• A) Operating expenses ✓ Correct Answer
• B) Structural integrity ✗ Your Answer
• C) Pipeline analysis

Question: The hedge fund strategy that typically requires the longest time commitment and has the greatest variability of investment returns is:

• A) distressed securities ✓ Correct Answer
• B) fixed income arbitrage
• C) merger and acquisition funds ✗ Your Answer

Question: The payoff profile of merger arbitrage positions is similar to the return on:

• A) a risky bond, short a call and long a put ✓ Correct Answer
• B) a riskless bond, short a put, and long a call
• C) a riskless bond, short a call, and short a put ✗ Your Answer

Question: Because convertible securities are issued sporadically by smaller companies in small offering sizes with unrated debt, the value of the embedded option tends to trade at:

• A) relatively low implied volatility levels compared with realized volatility for the underlying equity
• B) a discount to the implied equity volatility of the underlying equity ✓ Correct Answer
• C) a premium to implied volatility of the underlying equity. A hedge fund analyst working for a corporate pension fund uses a conditional linear factor risk model to identify the sources of return for the hedge fund Uno Investments (UNO). Through stepwise regression, the model identifies four independent factors: 1. Equity risk (SNP500) 2. Currency risk (USD) ✗ Your Answer

Question: Based on the data in Exhibit 1: Conditional Linear Factor Model Coefficients for UNO and the statement from the fund documents regarding UNO's strategy (and assuming that a t-statistic with an absolute value greater than 2 is significant), which of the following statements is most accurate?

• A) The macro analysts have exhibited good market timing skill with respect to equity risk ✓ Correct Answer
• B) UNO has been, on average, net short equity market risk during times of market crisis
• C) The macro analysts have exhibited poor market timing skill with respect to equity risk ✗ Your Answer

Question: A manager with superior market timing skills would exhibit which of the following statistically significant coefficients in the conditional linear factor model?

• A) USD: negative, DUSD: positive, CREDIT: positive, DCREDIT: negative ✓ Correct Answer
• B) USD: positive, DUSD: negative, CREDIT: positive, DCREDIT: negative ✗ Your Answer
• C) USD: negative, DUSD: negative, CREDIT: positive, DCREDIT: positive

Question: Which of the following rationales is least likely to be appropriate when justifying a 20% allocation to hedge funds in a multi-asset portfolio such as a corporate pension plan?

• A) The allocation will decrease portfolio volatility
• B) The allocation will increase portfolio risk-adjusted return ✓ Correct Answer ✗ Your Answer
• C) The allocation will increase portfolio return. Leigh Winstanton is a relative value hedge fund manager. She is currently analyzing government bond and swaps markets for pricing discrepancies, collating the data displayed as follows: 5-year Treasury Inflation-Protected Securities (TIPS) coupon rate: 1% (priced at par) 5-year Treasury bond coupon rate: 3% (priced at par) 5-year inflation swap fixed rate: 1.5% Winstanton also engages in convertible bond arbitrage trades. She collates data on a potential convertible arbitrage trade in the securities of Triste, Inc. (TST), a medium-sized manufacturer of agricultural equipment, displayed as follows: TST has in issue a 2-year 4% annual coupon convertible bond, priced at 115

Question: To capture the pricing discrepancy between the Treasury bond market and the swaps market, Winstanton should execute which of the following trades?

• A) Buy Treasuries, Sell TIPS, pay fixed under inflation swap
• B) Sell Treasuries, sell TIPS, receive fixed under inflation swap ✓ Correct Answer
• C) Buy Treasuries, buy TIPS, pay fixed under inflation swap ✗ Your Answer

Question: The immediate arbitrage profit from buying the TST convertible bond and converting into shares is closest to:

• A) USD 6 per share ✓ Correct Answer
• B) USD 4 per share ✗ Your Answer
• C) USD 10 per share

Question: Considering the objective of the new volatility trader, which of the following volatility trading strategies would most likely be appropriate for adding to the fund?

• A) Long positions in OTC options ✓ Correct Answer
• B) Roll down using VIX futures ✗ Your Answer
• C) Relative value volatility arbitrage using exchange-traded options

Question: Institutional limitations on banks and insurance companies are most likely to lead to pricing inefficiencies in which type of strategy?

• A) Volatility trading
• B) Distressed securities ✓ Correct Answer ✗ Your Answer
• C) Global macro

Question: Including which of the following hedge fund strategies in a diversified portfolio is least likely to mitigate drawdowns?

• A) Global macro
• B) Distressed securities ✓ Correct Answer ✗ Your Answer
• C) Equity market-neutral

Question: In order to establish a beta-neutral pairs trade, relative to the number of shares bought in the long position in HOM, Shore should short sell:

• A) the same number of shares in SAR ✓ Correct Answer
• B) double the number of shares in SAR ✗ Your Answer
• C) half the number of shares in SAR

Question: The increase in soft-catalyst trades by the merger arbitrage team will be expected to:

• A) increase the return and decrease the risk of the team ✓ Correct Answer
• B) decrease both the risk and return of the team ✗ Your Answer
• C) increase both the risk and return of the team

Question: The ratio of potential losses if the deal fails versus the potential gains if the deal succeeds for the BIG/SMA merger arbitrage trade is closest to:

• A) 4 ✓ Correct Answer
• B) 3 ✗ Your Answer
• C) 5

Question: The key factors an insurance settlements portfolio manager must successfully analyze include:

• A) the underlying interest rate on the policy, the early termination provisions of the contract, and the government bond yield curve
• B) expected policy cash flows, ongoing premium payment obligations, and the eventual death benefit to be received ✓ Correct Answer
• C) the probability that the insurance company will face financial pressure, the demeanor of the policy holder, and the age of the policyholder. Bobby Berg is an investment analyst at Conduit Asset Management (CAM), a manager of a large fund of hedge funds. Berg is performing research into investments relating to catastrophe reinsurance and life settlements, a relatively new sector for hedge fund investment. Berg meets with Michael Stern, a hedge fund manager who specializes in investments in the insurance sector. Stern discusses recent life settlement opportunities presented by insurance brokers and discusses their relative merits, the details of which are displayed in Exhibit 1. Exhibit 1: Selected Life Settlement Opportunities Insurance Pool Surrender Value ($m) Annual Premium (Percentage of Benefit) Life Expectancy of Pool vs. Mortality Tables ✗ Your Answer

Question: Based on the fee structure information provided, if CAM allocates equally to two managers —one of which makes a gross return of 8%, while the other manager realizes a gross return of –8%—the net return to CAM investors is closest to:

• A) 0.0% ✓ Correct Answer
• B) -1.5% ✗ Your Answer
• C) -3.1%

Question: How many of the three factors listed by the client of CAM would a fund-of-funds (FoF) structure be preferred to a multi-manager structure from the point of view of investors in the fund?

• A) Two ✓ Correct Answer
• B) None ✗ Your Answer
• C) One

Question: Long/short equity funds typically:

• A) eliminate market exposure through a net beta of zero ✓ Correct Answer ✗ Your Answer
• B) reduce standard deviation to zero
• C) maintain a net long equity exposure of 40–60%

Question: Distressed security investing generally:

• A) involves shorting the securities of the distressed firm ✓ Correct Answer ✗ Your Answer
• B) produces lower returns than other event-driven strategies
• C) uses low leverage

Question: Top down analysis is the key driver behind which of the following hedge fund strategies?

• A) Fixed income arbitrage ✗ Your Answer
• B) Merger and acquisition
• C) Global macro ✓ Correct Answer

Question: An ETF's tracking difference is most accurately measured as the:

• A) standard deviation of the difference in daily returns between the ETF and its benchmark ✗ Your Answer
• B) difference between the ETF’s return (based on its NAV) and the return on the index tracked ✓ Correct Answer
• C) annualized standard deviation of the differences between the daily returns of the ETF and its benchmark

Question: ETFs are most likely to underperform the benchmark by their:

• A) tracking error ✓ Correct Answer ✗ Your Answer
• B) expense ratio
• C) arbitrage gap

Question: Which of the following is most likely to represent a passive strategy for constructing an ETF?

• A) Smart beta ✗ Your Answer
• B) Representative sampling/optimization ✓ Correct Answer
• C) Alternative weighting

Question: An ETF is least likely to trade at a premium/discount to its NAV when:

• A) the ETF is infrequently traded ✓ Correct Answer ✗ Your Answer
• B) the underlying securities are exchange-traded
• C)

Question: Compared to long-term buy-and-hold ETF investors, investors that trade frequently are most likely to be concerned with:

• A) management fees
• B) trading costs ✓ Correct Answer ✗ Your Answer
• C) tracking error

Question: PSTO ETF is quoted at a bid-ask spread of 0.10%. ETF commissions are 0.04% of trade value. Management fees are 0.09% per year. The average annual total cost of holding the PSTO ETF for 3 years is closest to:

• A) 0.15% ✓ Correct Answer
• B) 0.45% ✗ Your Answer
• C) 0.30%

Question: It would be most accurate to state that ETF shares can be created or redeemed by:

• A) anyone, including individual investors using a brokerage account
• B) a special group of institutional investors (APs) only ✓ Correct Answer ✗ Your Answer
• C) accredited investors (i.e. qualified investors) only

Question: A portfolio with a factor sensitivity of one to a particular factor in a multi-factor model and zero to all other factors is called a(n):

• A) arbitrage portfolio ✓ Correct Answer ✗ Your Answer
• B) tracking portfolio
• C) factor portfolio

Question: In the context of multi-factor models, investors with lower-than-average exposure to recession risk (e.g. those without labor income) can earn a risk premium for holding dimensions of risk unrelated to market movements by creating equity portfolios with:

• A) greater-than-average market risk exposure ✗ Your Answer
• B) less-than-average exposure to the recession risk factor ✓ Correct Answer
• C) greater-than-average exposure to the recession risk factor

Question: A portfolio manager uses a two-factor model to manage her portfolio. The two factors are confidence risk and time-horizon risk. If she wants to bet on an unexpected increase in the confidence risk factor (which has a positive risk premium), but hedge away her exposure to time-horizon risk (which has a negative risk premium), she should create a portfolio with a sensitivity of:

• A) −1.0 to the confidence risk factor and 1.0 to the time-horizon factor ✓ Correct Answer
• B) 1.0 to the confidence risk factor and 0.0 to the time-horizon factor
• C) 1.0 to the confidence risk factor and -1.0 to the time-horizon factor ✗ Your Answer

Question: Diversification can reduce:

• A) systematic risk ✓ Correct Answer
• B) unsystematic risk
• C) macroeconomic risks ✗ Your Answer

Question: Portfolios A and B have an expected return of 4.4% and 5.3% respectively. Assume that a one-factor APT model is appropriate and the factor sensitivities of portfolios A and B are 0.8 and 1.1 respectively. The risk-free rate and factor risk premium are closest to: Risk Free Rate Factor Risk Premium

• A) 2.50% 3.00%
• B) 2.00% 3.00% ✓ Correct Answer
• C) 3.00% 2.00% ✗ Your Answer

Question: Pierre's answer to Belair's first request regarding the equally weighted portfolio, is closest to:

• A) 1.75% ✓ Correct Answer
• B) 2.13% ✗ Your Answer
• C) 2.63%

Question: The actual return of Merci is closest to:

• A) 9% ✓ Correct Answer
• B) 10% ✗ Your Answer
• C) 11%.

Question: Using Exhibit 2, the portfolio that has the most exposure to asset selection risk is:

• A) EM ✓ Correct Answer
• B) EC ✗ Your Answer
• C) EV

Question: Which two portfolios from Exhibit 3 best achieve Belair's goals in relation to business activity and inflation risk?

• A) B and A. ✓ Correct Answer
• B) B and E ✗ Your Answer
• C) C and E

Question: Which of the following is closest to 5% daily VaR for the data included in Exhibit 1?

• A) £126,000 ✓ Correct Answer
• B) £156,000 ✗ Your Answer
• C) £186,000

Question: Manning's paragraph detailing the historic simulation method is:

• A) correct ✓ Correct Answer
• B) incorrect about VaR calculation ✗ Your Answer
• C) incorrect regarding the application to portfolios containing options

Question: How many of Manning's limitations of VaR are incorrect?

• A) 1 limitation ✓ Correct Answer
• B) 2 limitations ✗ Your Answer
• C) 3 limitations

Question: Which one of the following is NOT a limitation of VaR?

• A) Incorporates only right tail risk
• B) VaR based risk limits may be inappropriate in trending markets ✓ Correct Answer ✗ Your Answer
• C) VaR computed during periods of unusually low volatility may underestimate actual VaR

Question: The break-even inflation rate is expected to be 2% over the next year. What is the credit spread for a 2% annual pay corporate bond maturing in one year with a market price of $96.91 ($100 par) if the real risk-free rate of return over the next year is 1%?

• A) 2.25% ✓ Correct Answer
• B) 0.19% ✗ Your Answer
• C) 2.00%

Question: If the market expects inflation to decrease over the next few years but the uncertainty about inflation was increasing, the break-even inflation rate is most likely to:

• A) Increase ✓ Correct Answer
• B) Decrease ✗ Your Answer
• C) Be uncertain

Question: The equity risk premium in Nearland is closest to:

• A) 4.50% ✓ Correct Answer
• B) 7.60% ✗ Your Answer
• C) 10.40%

Question: Of the asset classes mentioned by Professor Douglas, the most likely to be suitable as a consumption hedge is:

• A) real estate ✗ Your Answer
• B) growth stocks ✓ Correct Answer
• C) value stocks

Question: Market values of assets are most likely to be affected when either:

• A) Real risk-free rates, inflation premium, timing/magnitude of expected cash flows change ✗ Your Answer
• B) Risk free interest rates, risk premiums, timing and/or magnitude of expected cash flows change ✓ Correct Answer
• C)

Question: Value stocks are most likely to be characterized by:

• A) Low price multiples ✓ Correct Answer
• B) Immature markets ✗ Your Answer
• C) High earnings growth

Question: Rapidly developing economies like India and China have high GDP growth rates and therefore are most likely to have a:

• A) Low real rate, high inter-temporal rate of substitution and a low rate of current borrowing by investors ✓ Correct Answer
• B) High real rate, low inter-temporal rate of substitution and a high rate of current borrowing by investors ✗ Your Answer
• C) High real rate, low inter-temporal rate of substitution and a low rate of current consumption

Question: Investors are least likely to increase their savings rate when:

• A) Uncertainty about their future income decreases ✓ Correct Answer
• B) Expected rates of returns increase ✗ Your Answer
• C) Uncertainty about their future income increases

Question: Which of the following is most likely to be the shape of the yield curve during recessions?

• A) Upward sloping ✓ Correct Answer
• B) Flat ✗ Your Answer
• C) Downward sloping

Question: Which of the following statements is least accurate?

• A) The Sharpe ratio of a portfolio is unaffected by addition of cash or leverage in the portfolio
• B) Investors can take active risk that is suitable for them by investing in a combination of actively managed portfolio and benchmark portfolio ✗ Your Answer
• C) A closet index fund has a low Sharpe ratio ✓ Correct Answer

Question: Alisa Darent is evaluating several active portfolio managers with the same style and benchmark portfolio. Manager Active return Active risk Alfred 3.00% 12.00% Brad 2.20% 11.00% Charles 2.00% 10.50% Benchmark return is expected to be 11%. What will be the maximum expected return for Darent's portfolio assuming that she wants to limit her active risk to 11%?

• A) 2.20% ✓ Correct Answer
• B) 2.75% ✗ Your Answer
• C) 13.75%

Question: Which of the following terms is the number of independent bets per year made by an active manager?

• A) Information Coefficient ✓ Correct Answer ✗ Your Answer
• B) Transfer Coefficient
• C) Breadth

Question: An active manager currently covers 40 stocks and makes a forecast for each of them every quarter. Next year he intends to cover the same stocks but only once every 6 months. Assuming the manager's skill, measured in terms of the correlation of each forecast with actual returns doesn't change, which of the following statements is most accurate?

• A) The information coefficient will fall by approximately 50% ✗ Your Answer
• B) The information ratio will fall by approximately 30% ✓ Correct Answer
• C) The information ratio will fall by approximately 50%

Question: Which of the following terms is the ex-ante risk weighted correlation between forecasted active returns and actual active returns?

• A) Transfer Coefficient ✗ Your Answer
• B) Information Coefficient ✓ Correct Answer
• C) Breadth

Question: Which of the following statements is least accurate?

• A) Sharpe ratio of a portfolio consisting of a combination of benchmark and actively managed portfolio with positive active return will be higher than the Sharpe ratio of the benchmark ✗ Your Answer
• B) The information ratio of a constrained active portfolio is unaffected by aggressiveness of the active weights ✓ Correct Answer
• C) Unlike Sharpe ratio, information ratio is affected due to addition of cash or leverage

Question: Zeta fund has active return and active risk of 1.6% and 8% respectively. Benchmark portfolio has a Sharpe ratio of 0.35 and standard deviation of benchmark returns is 10.5%. What is the level of active risk that an investor would need to take to maximize the Sharpe ratio of a portfolio consisting of Zeta fund and the benchmark portfolio?

• A) 8% ✓ Correct Answer
• B) 7% ✗ Your Answer
• C) 6% Radina Radichkova, CFA, is considering investing in one of three actively managed funds whose benchmark is the FTSE 100. The Sharpe ratio and standard deviation of the benchmark are 0.50 and 15%, respectively. Alpha Bankso Crystal Active return 3.2% 2.8% 12.5%