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CFA Level 1 Sample Questions
The feature of a well-functioning investment industry that gives investors the ability to quickly buy and sell a significant amount of an investment without having a material impact on the price is described as: A liquidity B competitive markets C risk transfer - correct answer A According to fundamental ethical and professional principles applicable to the investment industry, which group should have its interests ranked first? A Clients B Employers C Co-workers - correct answer A Regulators often seek public consultation prior to the implementation of new regulations in order to: A ensure the new rules are favorable to those likely to be affected B educate consumers and service providers on the new rules C improve the final rules by undertaking a cost-benefit analysis - correct answer C A financial advisory firm that implements internal policies regarding information barriers, suitability standards, and restrictions on self-dealing is addressing issues related to which of the following types of regulation? A Sales practices rules B Trading rules C Disclosure rules - correct answer A The best financial statement to use to find information about what a company owns and owes others is called the: A income statement
B balance sheet C cash flow statement - correct answer B If two variables do not have a strong (linear) relationship, the correlation coefficient between the two variables will be closest to: A 0 B - C +1 - correct answer A In contrast to forward contracts, futures contracts: A trade on organized exchanges B have contract sizes tailored to investor needs C have negotiable expiration dates - correct answer A Which type of private equity strategy is most likely used to finance a start-up company? A Growth equity B Buyout C Venture capital - correct answer C In commercial real estate investment, the amount derived from discounting future cash flows of lease and rental payments plus capital appreciation represents the value of the: A asset B equity C liability - correct answer A The type of bank that is exclusively owned by its members is a: A savings and loan bank B commercial bank C mutual bank - correct answer C
Which of the following government actions will most likely lead to an increase in the level of aggregate demand? A reduction in: A transfer payments B public spending on social goods and infrastructure C the capital gains tax - correct answer C If Mexico is running a large current account deficit with Canada, which of the following will most likely occur? A Canada will reduce its imports from Mexico B The Mexican peso will depreciate relative to the Canadian dollar C There will be an increase in Canadian exports to Mexico - correct answer B If a company is liquidated, proceeds from asset sales are distributed to common shareholders: A before unsecured debt investor and preferred shareholder, claims are paid B after secured debt investor and preferred shareholder, claims are paid C after preferred shareholder claims are paid but before unsecured debt investor claims are paid - correct answer B Which of the following is not a sovereign bond issue? A State of New York municipal bond B US Treasury note C German bund - correct answer A Which of the following bonds contains an embedded option that provides the issuer certain rights? A Putable bond B Callable bond C Convertible bond - correct answer B At which stage in the trading process is cash exchanged for securities between parties in a given security trade?
A Settlement B Confirmation C Clearing - correct answer A A consumer pays off a car loan held by a bank with which he has no other business. Which of the following is the most appropriate document management practice for the bank to follow? A Return all documents to the consumer B Shred all documents related to the transaction C Determine which documents to retain and which to dispose of - correct answer C Diversification will not help reduce a portfolio's: A systematic risk B specific risk C overall risk - correct answer A Compared with passive investment management, active investment management will involve: A tracking a benchmark B market timing C lower transaction costs - correct answer B Which of the following is not a factor to consider in a document classification system? A Direction in which documents flow B Ensuring that all documents are standardized C Source of the document - correct answer B A fund manager's alpha is that part of the fund's return that can be attributed to: (a) the market (b) skill
C Asking Jones to only state facts about the company - correct answer B Which of the following is least likely a violation of Standard I (D): Misconduct? A Engaging in frequent fights on the trading floor B Offering higher-quality services to certain clients C Getting intoxicated during office hours - correct answer B Martha Stevens, CFA, is an investment manager who uses her friend, Robert James, exclusively for her clients' brokerage transactions. James provides better services than other brokers in return for a slightly higher price, which Stevens believes is justified. Which of the following statements is most accurate? A Stevens is in violation of Standard III (A): Loyalty, Prudence and Care. B Stevens is in violation of Standard III (B): Fair Dealing. C Stevens has not violated any standard. - correct answer C Alexis King, CFA, an investment manager at Invest One Corporation, is asked by her supervisor to make a presentation to a potential client. In the presentation, King uses weighted composites of all similar portfolios to present the firm's performance over the past 10 years, during which the firm earned an average return of 13%. Which of the following statements is most accurate? A King has violated Standard III (D): Performance Presentation. B King has violated Standard I (C): Misrepresentation. C King has not violated any standards. - correct answer C Frank Henry, CFA, works as an investment manager at Beta Financials. One of his clients offered him a free trip to Mauritius for excellent performance, which Henry accepted. Henry's boss recently learned about this arrangement from another employee, but did not do anything about the arrangement, as the client was very important to the firm. Which of the following is most likely? A Henry violated Standard IV (B): Additional Compensation Arrangements. B Henry's boss violated Standard IV (C): Responsibilities of Supervisors. C Henry violated Standard IV (B): Additional Compensation Arrangements and his boss violated Standard IV (C): Responsibilities of Supervisors. - correct answer C
Which of the following is least likely a violation of Standard V (B): Communication with Clients and Prospective Clients? A An analyst recommends an investment to a client without going into specific details because she feels that the client would not be able to understand the complex models involved. B An analyst divulges confidential information about current clients to prospective clients. C An analyst states his strong beliefs as facts in a research report. - correct answer B Which of the following is most likely a violation of Standard III (B): Fair Dealing? A An analyst emphasizes the high returns of a trading strategy to a client without providing detailed information about the strategy. B An analyst carries out trades for discretionary accounts before non‐discretionary accounts. C An analyst guarantees high returns on a risky investment. - correct answer B Laura Bolt, CFA, resides in a country called Lavasia, but frequently does business in Magmaland, with a client who is a citizen of Magmaland. Lavasia's law applies in this case and states that laws of the client's home country govern. Lavasia's laws are more strict than the Code and Standards, while Magmaland's laws are less strict than the Code and Standards. Bolt is most likely required to adhere to: A The laws of Lavasia. B The Code and Standards. C The laws of Magmaland. - correct answer B An analyst is flown along with a group of peers to a company's mining facilities on a chartered flight, and put up in a hotel for three days. In determining whether these arrangements violate Standard I (B): Independence and Objectivity, the analyst must consider: A Whether she can remain objective and whether her integrity might be perceived by her clients to have been compromised. B Whether she can remain objective and whether her employer is confident that she will remain objective. C Only whether her integrity might be perceived by her clients to have been compromised. - correct answer A
According to the CFA Institute Standards of Professional Conduct, which of the following must least likely be disclosed to clients? A Referral fees B Disclosures of personal holdings C Additional compensation earned by the member from tutoring candidates for the CFA exams in her spare time - correct answer C Which of the following is least likely a reason for the creation of GIPS Standards? A To remove the effects of survivorship bias B To prevent firms from presenting the performance of all portfolios under management C To ensure that performance is presented consistently over a period of time - correct answer B Which of the following is least likely a characteristic of GIPS? A The investment management firm must define the entity that claims compliance. B All fee‐paying discretionary portfolios are required to be included in composites defined according to a similar strategy or investment objective. C After presenting five years of compliant history, a firm must add annual performance each year going forward up to a maximum of 10 years. - correct answer C Gregory Robinson, CFA, works as a research analyst at a brokerage firm. His wife, Laura Robinson, CFA, is an analyst at another firm. One morning, Robinson elects to stay at home by the side of his ill wife. He receives a call from James, an investment banker, who informs him that the two largest mining companies that Robinson covers are getting taken over at a 50% premium to their current market values. This information has not been released to the public yet. Laura overhears the entire conversation and immediately purchases the stock for her clients. Standard II (A): Material Non‐Public Information has most likely been violated by: A Mr. Robinson and James. B Mr. and Mrs. Robinson. C All three of them. Answer: - correct answer C
To avoid plagiarism an analyst should most likely disclose: A The sources of widely available public information. B The sources of summarized reports of other analysts. C The sources of both widely available public information and summarized reports of other analysts. - correct answer C An analyst rates individual stocks in the market index as under perform, neutral, or outperform. The type of scale that is used to measure this data is most likely a(n): A Ordinal scale. B Ratio scale. C Interval scale. - correct answer A An analyst collects the following information about an investment's returns over the last 24 months: Mean return = 18% Standard deviation of returns = 12% Given a risk‐free rate of 5%, the Sharpe ratio for this investment is closest to: A 2. B 0. C 1.083 - correct answer C Susan estimates that the probability of the stock market rising in value over 2010 is 40%. The odds that she would offer against the market rising are closest to: A 2 to 3 B 3 to 5 C 3 to 2 - correct answer C Which of the following is most likely? A Investors would prefer a portfolio with a higher SF Ratio because it has a lower probability of generating a return greater than the threshold level. B Investors would prefer a portfolio with a higher SF Ratio because it has a lower probability of generating a return lower than the threshold level. C Investors would prefer a portfolio with a lower SF Ratio because it has a higher probability of generating a return higher than the threshold level. - correct answer B
C 11% - correct answer A A sample of five students scored 75%, 86%, 92%, 63%, and 52% on a test. The standard deviation of the sample is closest to: A 14.65% B 16.38% C 13.10% - correct answer B An educational institute that provides classes for the CFA exam has two batches enrolled for the June 2010 exam. Historically it has been observed that 69% of the candidates enroll in the weekday batch, while the remaining 31% prefer the weekend batch. The historical pass rate for the weekday batch has been 52%, and has been 63% for the weekend batch. Given that a student failed the exam, the probability that she was from the weekend batch is closest to: A 34.6% B 25.72% C 11.47% - correct answer B Twelve athletes participate in a race. The number of different ways that the gold, silver, and bronze medals can be awarded to these athletes is closest to: A 1, B 220 C 36 - correct answer A An increase in the price of Product B leads to an increase in demand for Product A. Product A and Product B are most likely: A Inferior goods. B Substitute goods. C Supernormal goods. - correct answer B The lowest point on the long-run average cost curve is most likely known as the firm's: A Minimum efficient scale.
B Maximum efficient scale. C Econometric scale. - correct answer A Increasing and decreasing marginal returns to labor most likely explain the U‐shape of the: A Short-run marginal cost curve. B Long-run average cost curve. C Short-run total product curve. - correct answer A Which of the following is most likely regarding the Stackelberg oligopoly model? A Firms in the industry make their decisions sequentially. B None of the firms in the industry can increase profits by unilaterally changing its price. C All firms in the industry are interdependent. - correct answer A The difference between total value to buyers and total variable cost of producers is most likely known as: A Consumer surplus. B Producer surplus. C Total surplus. - correct answer C If economic data suggest that the economy is undergoing an expansion caused by an increase in aggregate demand (AD), investors should least likely increase their investments in: A Cyclical companies. B Commodity-oriented companies. C Defensive companies. - correct answer C Which of the following is least likely positive for a Giffen good? A The relationship between the income effect and the price change B The relationship between the substitution effect and the price change
A An accrued expense, an asset. B A prepaid expense, an asset. C An accrued revenue, a liability. - correct answer B An analyst gathered the following information about a company that follows U.S. GAAP for a given year:
- Beginning shareholders' equity $1,350,
- Net income $250,
- Dividends declared $75,
- Dividends paid $85,
- Ending shareholders' equity $1,575, The company's comprehensive income for the year is closest to: A $50, B $300, C $60,000 - correct answer B Assume U.S. GAAP holds. An analyst gathered the following information about a company for a given year:
- Net income 12.5m
- Depreciation 1.25m
- Amortization 0.5m
- Interest expense 3m
- Net capital expenditure 1.75m
- Dividends paid 0.25m
- Working capital investment 1.15m
- Tax rate 35% Free cash flow to the firm for the year is closest to: A $13.3m B $13.05m C $9.4m - correct answer A
Consider the following statements: Statement 1: In the first year of a company's operations, FIFO and LIFO will result in the same amount for cost of goods available for sale if prices have been declining over the year. Statement 2: In a period of falling prices, use of LIFO will enable a firm to retain more cash. Which of the following is most likely? A Both statements are incorrect. B Only Statement 1 is incorrect. C Only Statement 2 is incorrect. - correct answer C A company's management wishes to report higher earnings for the next few years. In order to accomplish this, management will most likely: A Increase the asset's useful life estimate and the estimated salvage value. B Increase the asset's useful life estimate and reduce the salvage value estimate. C Increase the estimated salvage value and reduce the useful life estimate. - correct answer A A company reports income tax expense of $25,000. During the year it reports a decrease in deferred tax liabilities of $12,500 and an increase in deferred tax assets of $5,000. The company's taxes payable for the year are closest to: A $42, B $7, C $17,500 - correct answer A Which of the following sources of changes in the net pension asset/liability is most likely to be recognized in other comprehensive income? A Service costs. B Net interest income. C Actuarial losses. - correct answer C Under the effective interest method, a company that issues zero-coupon bonds will least likely report:
In common‐size income statements, which of the following items is least likely always expressed as a percentage of sales? A Income taxes B Depreciation C Interest expense - correct answer A Unearned revenue is most likely classified as: A Owner's equity. B Liability. C Asset. - correct answer B Which of the following is least likely a characteristic of an effective financial reporting framework? A Comparability B Comprehensiveness C Transparency - correct answer A Under IFRS, which of the following is most likely when the outcome of a long-term project cannot be measured reliably? A The percentage of completion method is used. B The completed contract method is used. C Revenues are recognized to the extent of costs incurred during the period. - correct answer C Which of the following ratios is most likely lower in the early years of an asset's life if the company uses the straight-line method instead of the double-declining balance method for depreciation? A Operating profit margin B Operating return on assets C Asset turnover - correct answer C
Introduction of a new model causes a decline in sales of a car manufacturer's older models. This is most likely an example of: A An externality. B A sunk cost. C An opportunity cost. - correct answer A The NPV profile of Project A is steeper than that of Project B. Which of the following is most likely that the crossover point occurs at an NPV of $5,000? A Project B has higher total cash inflows. B Project A receives most of its cash flows later in its life. C Project A has a higher IRR. - correct answer B A drag on liquidity is most likely to occur when: A There is a delay in cash coming into the company. B Cash leaves the company too quickly. C The company loses creditworthiness. - correct answer A Consider the following statements: Statement 1: Dual-class share structures can easily be changed over time. Statement 2: Activist investors tend to have little impact on the company's long- term investors. Which of the following is most likely? A Only Statement 1 is correct. B Only Statement 2 is correct. C Both statements are incorrect. - correct answer C A project's beta is least likely to be exposed to: A Business risk. B Financial risk. C Default risk. - correct answer C
